AFIC Chief Financial Officer Andrew Porter considers why AFIC shareholders should not be too concerned about the recently proposed changes to the franking credits system.
For all the talk surrounding franking credits recently, we don’t believe that the recent changes to the franking credits regime proposed by the federal government are likely to adversely affect AFIC, the share market, or the income stream that we provide for our shareholders through fully franked dividends.
However, we remain vigilant to ensure governments do not tinker with the franking credit system at the expense of ordinary shareholders and retirees. We'll continue to watch any further developments closely and make representations as necessary, as we have done in the past.
As a reminder, the Federal Government recently proposed two changes to the franking credits system. The first one, made by Treasury in September 2022, regards franked distributions funded by capital raisings. Under the proposal, franking credits would not be available for distributions made since 19 December 2016 if they are funded by raising capital and made outside of established, regular distribution patterns.
The proposal intends to make it harder for companies to raise funds by issuing shares so that they can pay a franked dividend. It does not affect ordinary distributions that are made on a regular basis but targets artificial arrangements designed to distribute franking credits.
As we explained at our AGM and shareholder meetings, we had concerns about the looseness of the wording of draft legislation which we provided comments on, and its retrospectivity which the Government have said they will review.
We believe though that AFIC is not in danger from it because we don’t raise capital to distribute franking credits. Also, we believe the impact of the measure would be quite narrow, affecting mostly private companies.
The Federal Government announced the second proposal in the Budget of October 2022. This proposal seeks to align the tax treatment of off-market share buybacks undertaken by listed companies with the tax treatment of on-market buybacks. It would deny the “streaming” of franking credits via off-market buybacks which some companies, such as global miners BHP and Rio Tinto, have used to distribute their excess franking credits. This was always a bit of an anomaly.
The alternative could have been to reduce the maximum discount that applied to the buyback, but we can understand the Government’s approach. In an ideal world, it might actually lead to companies paying out more special dividends with those franking credits, which would be good for us. We'll just have to wait and see.
AFIC is an active portfolio manager targeting high-quality stocks that pay good dividends.
Much of the income that we provide to our shareholders comes from regular, sustainable dividends paid by high-quality companies in the AFIC portfolio. These companies have strong balance sheets, good management, market-leading positioning, and good prospects for growth.
This is the basis on which we have developed the investment portfolio, and these proposed changes to the franking credits system will not alter this.