Geoff Wilson: "Illogical" changes could see investors miss out on $85 billion in fully franked dividends

"These two pieces of legislation will significantly impact companies' abilities to pay fully frank dividends and significantly impact the banking system to operate efficiently," Wilson said. 

"It will significantly influence where companies invest, in terms of investing in Australia versus overseas, as well as to what extent they do invest." 

And it's not just companies that will be worse off, Wilson said, 17 million Australians (or anyone with super) will miss out on $85 billion in fully franked dividends... annually (that's the amount companies pay, on average, each year).

"$85 billion in fully franked dividends didn't get paid last year, which could have been paid," he explained. "If this legislation comes in, it never will be."

The power of Keating's franking credit system

Franking credits, or imputation credits, help prevent double taxation and are distributed to shareholders alongside dividends when an Australian company has already paid corporate tax. 

For example, if a company made $100 million pre-tax profit, it will pay $30 million in tax (30%). The company can then pay out the remaining $70 million to shareholders as a fully franked dividend.

Investors then include the franking credit received as part of their gross taxable income, together with the dividend income, and utilise the tax paid on their behalf to reduce any tax liability they have. If the investors’ resulting tax position is a liability, they pay additional tax on their net taxable income, or if the resulting tax position is an asset, they will receive a refund of the excess tax that has been paid on their behalf.

This is why there was so much uproar back in 2018 and 2019 when Bill Shorten tried to crack down on franking credits. In fact, later, he admitted this policy cost him the election. 

But it's not just companies, superannuation funds and individual investors who enjoy the benefits of Keating's franking credit system. According to Wilson, it also has kept our economy afloat for the past 30 years. 

"In 1987, Paul Keating introduced the system with Bob Hawke. He came out in the early 90s and talked about the recession we had to have. And since that recession, we've had 30 years of uninterrupted growth without a recession," Wilson explained. 

"One of the reasons we've had that is because of the franking system. The dividend imputation system removes double taxation." 

Outside of Australia, it's in a company's interest to take on more debt rather than raising equity, he said, as paying interest on this borrowed cash is tax deductible. 

"However, in Australia, because of our franking system, that reduces the cost of capital for Australian companies," Wilson said. 

"So Australian companies tend not to borrow money to the extent that they do in the US or Europe, they tend to have less debt and more equity on their balance sheets. That means when things get tough and when economies are slowing down, the Australian economy does so much better." 

In fact, Wilson believes Australia's capital system is to thank for surviving the Global Financial Crisis, and why we are unlikely to collapse into a recession in the coming year. 

"Relative to the US and Europe, we'll outperform. Why? Because equity is cheaper than debt, and that's because of the franking system," he said.