AFIC Chairman John Paterson and Chief Financial Officer Andrew Porter address the Federal Government’s recent proposal to stop companies paying shareholders fully franked dividends that are funded by capital raisings.

The draft legislation is supposed to specifically address situations where companies are issuing capital with the intention of returning it to shareholders via fully franked dividends. This was the subject of a Tax Alert from the Australian Taxation Office in 2015 and draft government legislation in 2016.

There are several factors to consider.

• There are concerns about the looseness of the wording of the draft legislation and accompanying documentation.
• There are concerns that the draft legislation is retrospective. Retrospectivity is normally never a good idea.
• There is a general fear that there is a track record of interfering with franking, especially now with the Government decision to effectively disallow off-market buybacks.

That said, the draft legislation appears very narrow. We believe that AFIC and other LICs are not in danger from it because we don’t raise capital to free up franking credits, but there is a need to be careful in the wording of the legislation and to address the issue of retrospectivity.

More generally we believe the franking credit system is a good system for Australia. It has encouraged broad shareholder ownership and has provided a system where companies are very well supported by retail shareholders when raising capital for growth.

In this context whenever there’s been a broad threat to franking, we’ve enunciated our concerns in Canberra and, if it happens again, we will be quick to defend the interests of our shareholders.