Wilson: 25,000 reasons to stop changes to dividend imputation

Labor’s proposal to scrap franking credit cash rebates has been one of the most divisive and important topics of debate for Livewire readers. Earlier this week Geoff Wilson AO, Chairman of Wilson Asset Management, made his case for preserving the existing system. Here are the key points delivered in his speech that drew on data from 25,000 signatories opposing Labor's policy.  

On protecting the current dividend imputation system 

Wilson argues that the current system, established in 1987 by the Hawke Government and improved in 2001, is fair, equitable and enables:  

1. Robust capital formation. 
2. Efficient capital distribution.
3. A more stable economy with reduced cyclicality. 

“Dividend imputation leads to efficient capital allocation by directing capital towards Australian companies. Dividend imputation encourages Australian companies to invest in Australian projects as franking credits are not earnt on foreign income. Increased local investment is a boon for Australian workers, the Australian Tax Office and Australian shareholders.” 

On reducing leverage in corporate Australia 

Wilson drew on research from Goldman Sachs to make his case that the current system has provided a defence against debt-related systemic risks in the financial system. 

“In lowering the costs of equity relative to debt, dividend imputation limits the imperative for companies to gear. As a result, Australian companies have relatively low levels of gearing compared to other countries.” 

“Leverage exacerbates the cyclicality of financial markets as it drives companies’ performance during bull markets and exaggerates companies’ losses during financial downturns.” 

“Goldman Sachs Investment Research found that Australia has the lowest level of gearing when adjusted for its sector mix.” 

We believe dividend imputation has significantly benefitted Australia’s financial system and contributed to the fact that Australia has not experienced a recession in 26 years. 

On giving a voice to retail investors  

Wilson Asset Management have collected signatures from over 25,000 Australian investors. A poll of this group revealed the following stats: 

• Approximately 70% earn $90,000 or less per annum.  
• Each year, almost 85% would lose up to $30,000 year and nearly 15% would lose more than $30,000.
• More than half would be forced to reduce their family’s living standard and quality of life.
• Almost a third plan to spend their financial assets in order to receive the Age Pension. 

“In markets and in politics, retail investors are often overlooked, and their voices are rarely heard. We have heard thousands of individual stories about how Labor’s planned changes to the dividend imputation system will devastate people’s lives.”

Labor’s policies will not only significantly impact retirees and low-income earners, but they will destroy the aspirations of a generation of young Australians. 

On poor policy and worse timing 

Wilson threw his support behind a proposed moratorium on changes to the superannuation system.  

“Independent MP Kerryn Phelps has introduced the very sound idea of a moratorium on changes to the superannuation system, given people need certainty to plan for their retirement and future."

I believe that a large part of Phelps’ success in Wentworth was driven by her overt support for the current dividend imputation system. 

Wilson drew parallels between Labor’s Minerals Resources Rent Tax proposed by the Rudd government in 2012. He argued that the proposed policy would amplify the effects of a looming bear market.

“Labor’s attack on the equity market in the final period of a record bull market resemble the Rudd Government’s Minerals Resource Rent Tax in the dying days of the mining boom – poor policy and worse timing.” 

“Bear markets are extremely painful, and we expect the negative effects of the looming bear market will be significantly worse if Labor wins office and introduces their draconian policies.”

Listen to the full speech below