Assessing the possible impact of the proposal to limit access to cash refunds of imputation credits on franked dividends is far from straightforward. Even those investors who would still receive imputation credits need to consider how share prices would be affected and what action they might need to take.
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The proposed changes may never see the light of day. Even if enacted, they may be modified to remove some unintended consequences. However, if they are enacted and the revenue gained is large, the impact on the prices of franked dividend paying shares could be substantial.
The projected revenue from this proposal is about seven times the cost of exempting the $140 billion Future Fund from the changes. This suggests that total portfolios of up to $1 trillion could be affected by any change. If only 20 per cent of these portfolios are invested in local shares, the yields on up to $200 billion of shares would be reduced by up to 30 per cent.
While this amount is only an estimate, also relevant is the ageing of our population. The total value of assets owned by retirees eligible to invest in zero tax rate pension funds will continue to increase. The growth in demand for Australian shares will have to come from elsewhere.
In this global economy, retirees and lower income private investors have access to a wide range of alternative domestic and overseas investments that don’t involve paying 30 per cent company tax. With no imputation credits, paying 21 per cent US company tax could be better than paying our 30 per cent company tax rate.
Regarding the strength of our share market, the crucial question is: If retirees and others reduce their Australian share exposure, who will replace them? With our 30 per cent tax rate and no access to imputation credits, Australia is already less attractive to overseas investors with access to lower company tax regimes.
While there’s uncertainty about what if any changes will emerge, the attractions of acquiring shares paying fully franked dividends will be reduced. Pension funds which are overweight in Australian shares can reduce their holdings without paying capital gains tax.
Less fortunate are the mums and dads owning in their personal names shares such as CBA with substantial capital gains attached. When the tax on selling is substantial, holding on and selling later if franking credits are available to offset the capital gains tax could be preferable.
There’s a clear message, especially for investors whose portfolios are overweight in Australian shares to obtain fully franked dividends. Even if they personally don’t lose access to their franking refunds, a major change restricting access to franking credits for some investors could adversely affect share prices generally.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au
