As the nation’s newspapers — read almost exclusively by old people — go the full-court press on Labor over its reversal of the Howard-era dividend imputation refund, and that hitherto-undiscovered species, the wealthy shareholder retiree who insists “I’ve always voted Labor, but no more!” takes the media spotlight, what about the implications for the efficiency of our savings pool?

We’ve been banging on about the efficiency, or lack thereof, of our colossal national savings pool for some time. Back in 2000 — when Howard and Costello, in an effort to shore up their then-ailing political prospects by loading taxpayer money into a cannon and firing it at their political base, introduced refundability for dividend imputation — the super pool was around $400 billion. The latest figures from the ABS shows it’s now $2.65 trillion. It’s the fourth largest pool of savings in the world.

A couple of things have happened along the way. A swarm of ticket-clippers, fund managers and other gravy train riders have descended like a (to mix metaphors) plague of locusts on this colossal treasure. We’ve seen overseas giants like Vanguard and BlackRock enter the market, looking to grab some of the tens of billions of cash flow, fees and contributions, and the emergence of millionaires and billionaires (such as the recently retired Keir Neilsen of Platinum Funds Management). 

The other things is that, as Industry Super Australia showed a few years back, the efficiency of that savings pool in generating new investment has declined. Instead, all those fund managers and ticket-clippers have been busy chasing equities in existing companies and housing market profits rather than channelling it into new business ventures that might produce, say, the Australian Google. 

One gravy train rider has suggested that the refundability issue has encouraged that decline. Gareth Brown of Forager Funds responded to Labor’s policy earlier this week:

This would be a trivial discussion if we were talking only about a small number of low-income share owners. But Australia’s superannuation system means there is a substantial number of very large savings pools that pay tax rates of 0% or 15%.

As a result, the effective tax rate on a large proportion of Australia’s corporate profits is 0% or 15%. As a general principle, I think that corporate earnings should be subject to the corporate tax rate at a minimum. That should apply whether those profits flow to shareholders as dividends or are retained by the company and reinvested.

Brown nails the bigger issue:

For one, it would remove a large distortion in our system, one that sees a dollar retained by a company worth less than one paid out to a low-tax rate shareholder. This explains the immense pressure on Australian companies not to cut dividends unless they’re on their death bed.

Refundability has skewed investment by listed companies. They are under enormous pressure to maintain earnings and pay dividends at all costs, otherwise there is a sharp sell-off in shares because they become less attractive to wealthy retirees and self-managed super funds and the ticket-clippers who advise them. We have seen some companies suspend dividends when under pressure — Qantas, Seven West Media, Metcash, Vocus, and Origin Energy are recent examples — but usually that comes as a last resort instead of an early option to conserve cash while the company restructures or lifts investment.

This is the issue at the heart of the company tax debate: if US CEOs, without the endless pressure to maintain dividends, are throwing most of the Trump tax cuts at share buybacks and dividends, what do you think will happen with Australian companies when they get a cash windfall?

While critics of Labor’s plan are harping about “unintended consequences”, no one except people like Brown are pointing out the unintended consequence of a tax/super system that makes companies that pay out big dividends more popular with a certain class of investor than companies prepared to reinvest profits into job creation and entrepreneurship.

Brown admits his bias about Labor’s policy: “Many of us on the gravy train (which certainly includes me) might disagree.” But as he notes, “even if the fairness argument doesn’t appeal, maybe self-preservation will. Scrapping dividend imputation refunds seems preferable to scrapping imputation entirely. And that’s what they’re calling for in some quarters.”

You’re already hearing, and will continue to hear, an awful lot of bullshit about refundability from interested parties. Kudos to one gravy train rider for looking beyond his narrow interest.

Peter Fray

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