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Explaining Abbott’s double slug on Australian investors

Slugging big, rich ASX-listed companies may have seemed smart three years ago, but targeting millions of shareholders who own them is another thing. Tony Abbott has it wrong on paid parental leave.

When The Australian Financial Review devotes all of page four, The Australian runs it off the front page and Fran Kelly gives it 10 minutes on Radio National, then surely Opposition Leader Tony Abbott knows he’s onto a loser with this unprecedented Greens-backed $5.5 billion paid parental leave scheme.

Slugging big, rich ASX-listed companies might have seemed smart three years ago, but targeting the millions of shareholders who own them is quite another thing. And that’s precisely what the Coalition’s shadow finance minister and campaign spokesman Mathias Cormann did yesterday when he confirmed the 1.5% levy on big companies would not count as a tax credit when franked dividends are paid out.

Ironically, it was the Greens that inadvertently stirred up the latest hornets’ nest when The Guardian yesterday pointed out the independent Parliamentary Budget Office had valued the franking credits decision at $1.6 billion a year. That’s because the Greens — which are backing the hugely generous PPL scheme despite Abbott putting them near last on how-to-vote cards across the country — had earlier asked the PBO to cost their own very similar scheme.

In hindsight, it is surprising the franked dividend debate did not emerge during the 2010 campaign.

The decision to not allow the 1.5% levy on companies that make gross profits of more than $5 million per year to claim the impost as a franking credit was the measure that allowed the Coalition to move from shadow treasurer Joe Hockey’s “50, 60 or 70% funded” comment to Neil Mitchell on 3AW on Monday morning to claims of full funding by yesterday.

Explaining Paul Keating’s dividend imputation reforms of 1987 is not straightforward, but the key point is that it was designed to avoid double taxation. If a company has paid tax at the 30% corporate rate then you get a tax credit and potentially a refund cheque, defending on your personal tax rate.

The federal government’s own Future Fund received $270 million worth of franking credit refunds in 2012-13. This would be cut once the PPL scheme started in 2015, even after you factor in the Coalition’s proposed cut in the corporate tax rate to 28%.

Ironically, self-managed super funds with their low 15% tax rate would be hit harder than your regular direct individual investor on the top 46.5% tax rate — the franking credit reduction reduces the SMSF tax refund by more than it increases the tax on the wealthy individual investor.

The real political dynamite in this decision is the discrimination against Australian-based investors, as opposed to foreign investors in foreign companies like Apple, Google and News Corp. Foreign companies own a majority of the Australian economy, which is why there are about 2000 unlisted companies affected by the levy and only 1000 that are listed.

When it comes to the $1.6 billion franking component, that will exclusively come from Australian-resident taxpayers who claim the franking credit.

The best example of a foreign company not valuing franking credits is London-based Rio Tinto, which has amassed almost $20 billion in undistributed franking credit because more than 80% of their shareholders are foreign based and can’t use them. This is why Rio Tinto shares trade up to 20% higher on the Australian market as compared to the UK.

The Commonwealth Bank has about 750,000 retail investors who are estimated to collectively own about 40% of the $115 billion company. The bank is paying a fully franked dividend of $2 a share on October 3, which will distribute a record $3.2 billion to its shareholder base.

The proposed 1.5% levy is one thing, but at least it hits all big companies operating in Australia similarly. Extending it to franking credits is a second hit, which concentrates the $1.6 billion impost exclusively on Australian-based taxpayers, treating them differently to foreign investors.

*Stephen Mayne is policy and engagement co-ordinator for the Australian Shareholders’ Association and wasn’t paid for this item

  • 1
    Posted Wednesday, 21 August 2013 at 1:00 pm | Permalink

    Thanks for this very simple explanation of a complex situation
    It’s a classic of LibNat ‘policy’; rip off ordinary Australians to pay the rich. Bad policy, poor outcomes for a more equal society and dressed up to appeal to some highly paid professionals who will vote for TA anyway.
    The group you haven’t mentioned here is the average Aussie whose super is invested in these companies and whose returns will be affected. But then it is all too complex to explain, isn’t it?

  • 2
    stephen Matthews
    Posted Wednesday, 21 August 2013 at 1:18 pm | Permalink

    1.5% divided by 30% is not a significant change to the status quo . It arouses ms Kelly because the franking regime is so poorly understood in the mainstream media. The bigger scandal is what the major super funds do with their members’ franking credits. If SMSFs can use them why cant the major super funds?

  • 3
    The Pav
    Posted Wednesday, 21 August 2013 at 4:34 pm | Permalink

    Trying to understand the credentials of a party that wants to both cut & raise company tax at the same time.

    Quite frankly as a self funded retiree I don’t want to subsidise rich high income earners procreation just so Abbott can appear to “get” women.sexy or otherwise

  • 4
    Interrobanging On
    Posted Wednesday, 21 August 2013 at 4:36 pm | Permalink

    …surely Opposition Leader Tony Abbott knows he’s onto a loser’

    Bad policy and economic voodooism are irrelevant if it works as an electoral bribe. A woman (and perhaps partner too) standing to get $10 000s extra in her handout for the private decision to have a child must be sorely tempted to vote for Abbott.

    Of course, Abbott’s Battlers on $150 000+ get the biggest cash bribe, but even low income earners get more and there must be temptation there.

    Some of the media is spinning it as a success in these terms because target punters like it. The risk is losing other voters for the overly generous and unaffordable nature of it and what is being taken away to pay for it. Perhaps there are even a few who think Abbott’s reverse mean test intentions are going too far.

    stephen Matthews: 1.5% divided by 30% is 5%. Not exactly tiny. I guess you mean 1.5% multiplied by 30%. And don’t forget the whipped up issue about a 0.05% bank levy - the amount had little to do with the hysterical over-response.

  • 5
    Posted Wednesday, 21 August 2013 at 5:12 pm | Permalink

    Stephen, the 1.5% is taken off before the profits are declared. That is any profits by those companies (think Commonwealth Bank last week) will be taxed an extra 1.5% leaving less to be paid out to shareholders as dividends. So the dividends will be smaller. On your super fund and mine.
    Nice ripoff by TAbbott, hoping most punters won’t understand. And they won’t because the journos find it too complex to explain. After all it requires more than a three word slogan.

  • 6
    David Hand
    Posted Wednesday, 21 August 2013 at 5:43 pm | Permalink

    Bad policy.
    I’ve believed it so ever since it was announced.

    I think there’s a dog whistle in this, which is that it’s an incentive scheme to encourage higher achieving mostly white women to have more babies.

    Won’t work though.

  • 7
    Bill Hilliger
    Posted Wednesday, 21 August 2013 at 8:26 pm | Permalink

    Will an Abbott government start tinkering with franking credits to help pay for their policies; some say Joe H is contemplating such a move once in government.

  • 8
    BSA Bob
    Posted Wednesday, 21 August 2013 at 8:41 pm | Permalink

    Symptomatic of what we can look forward to. He’ll need money & won’t give a rat’s where it comes from.

  • 9
    Mike M
    Posted Thursday, 22 August 2013 at 8:26 am | Permalink

    More bloody middle class welfare, which the liberals seem to specialse in. Standby for more increase in taxes and cuts in infrastructure spending under Abbott. Next year is going to be a wild ride so strap yourselves in.

  • 10
    Tom Jones
    Posted Thursday, 22 August 2013 at 12:22 pm | Permalink

    This is a very mixed up policy. In every other aspect Industrial Relations are seen as just that but this policy is part welfare, part industrial relations and part taxation. It is hard to see why those who rely on share dividends for superannuation should be hit to pay for children who are needed for the future but whose own parents are a long way off retirement.

    It is also hard to see why as a welfare measure as it is paid by the government there should be inequitable distribution. Many, many women in the workforce are in casual low paid work without any leave entitlements and so presumably they get nothing along with other women who have left the workforce in order to have and raise their children.

    On an industrial relations front it is also hard to see why it doesn’t go through Fair Work Australia or its progeny as a piece of legislation for parental leave.

  • 11
    Posted Friday, 23 August 2013 at 1:55 pm | Permalink

    I wonder if a woman earning $100K a year happens to lose her job, will she get a proportionally larger dole payment?

  • 12
    Posted Friday, 23 August 2013 at 4:05 pm | Permalink

    You know you are on a winner of a policy when the harshest criticism that arises is “Oh no, think of the investor!”. Funny stuff.
    We will be fine. Franked dividends are just a way of returning capital to shareholders in a tax effective way but there are many ways to skin a cat. Companies can stop paying dividends altogether and return capital via share buybacks or rights issues if they need to (which is what happens in the US as dividends are taxed at higher rates than capital gains). One dollar of capital gain is the same as a dollar in dividend for an investor at the end of the day.
    As for Abbott’s Paid Parental leave scheme, it is extremely generous but it’s been created for political reasons, not economic ones…to give women a reason to vote for him.
    Hence all the economic arguments in the world, and there are better ones than the impact on franked dividends, will have no impact on whether this scheme gets up or not.

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