The company has two options. It can increase payouts to all shareholders or as it previously has done organise an off-market share buyback. A buyback has the advantage of allowing shareholders to decide whether to participate.

Shareholders including non-residents and high marginal rate taxpayers who face additional personal tax liabilities on the dividends they receive can choose not to participate. They will still benefit from the increase in their future earnings potential resulting from a reduction in the number of shares on issue.

Using up its large franking credit reserve has substantial benefits for resident shareholders particularly superannuation and pension funds subject to no or low tax rates. Imputation credits operate by refunding company tax previously paid to resident shareholders.

The faster company tax payments are distributed to shareholders the greater is the value of the franking credits to shareholders. When as in the case of pension and super funds the value of the franking credit exceeds the tax rate, shareholders receive a tax credit to offset other tax payable or since 2001 a cash refund of the surplus credits.

Higher rate resident taxpayers face additional personal tax liability when they receive franked dividends. Nevertheless, the tax payable on the franked dividends they receive can still be lower than the tax on their wages and other investment income. As well, the tax system doesn’t increase the value of franking credit reserves for inflation.

As a result, the longer franking credits are held in reserves, the lower is the real value to resident shareholders. Reductions in company tax rates also reduce the value of franking credit reserves because imputation credits can only be refunded at the prevailing company tax rate. The Australian company tax rate has been as high as 49 per cent but company tax paid at that rate can only be distributed to shareholders at a 30 per cent tax rate.

The Labor party’s announced policy to cease cash refunds of franking credits from 1 July 2019 for superannuation and pension funds and non-pensioners also increases the incentive to pay large franked dividend payments to shareholders before that date. Not providing cash refunds of excess franking credits will greatly reduce the value of franking credit reserves for low rate shareholders currently eligible to receive refunds.

BHP as already foreshadowed increasing its distributions to its shareholders. Shareholders in other companies with franking credit reserves can only hope that companies will follow BHP’s lead.

Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au