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Franked dividends boost corporate balance sheets

Australia should retain cash refunds for excess imputation credits for super funds as this is the reason Australian corporate balance sheets are in robust condition, according to Fidelity Australia.

Fidelity Australian Opportunities Fund portfolio manager Kate Howitt said the reason for this is that unlike companies in the United States, Australian companies by and large do not engage in significant buy-backs.

This is because they can deliver tax-efficient dividends, Howitt said.

“When we look at the dynamic of what’s happening in the US capital markets in terms of de-equitisation, corporate buy-backs, higher corporate debt levels and losing innovation into other non-market environments, we’ve largely avoided that fate,” she told a 2019 outlook briefing in Sydney today.

“So I get very nervous when you get rumblings about maybe we should do away with franking. It all comes from Treasury saying there’s revenue leakage to the federal government because of this.”

She argued it is a short-sighted approach to resetting a policy that has been fundamental to some of the dynamism Australia has managed to preserve in its markets.

“The bigger issue from an economic point of view is you need to retain the franking regime overall. The much more important thing is not say franking overall is a negative impact on the revenue to the Treasury,” she said.

“That’s what would be a really retrograde step for longer-term economic prospects of the country.”

The system of franked dividends avoids double taxation as it is rebated at the individual member level, which creates corporate discipline as it is economically efficient to pay dividends, she said.

Those dividends then go back to investment companies, which can reinvest that money into different growth companies, she said.

However, because this facility is unavailable in the US, investors have access to less money to buy smaller companies, she said.

Smaller companies are finding the listed environment more difficult to invest in and are therefore shifting to the unlisted venture capital space, she noted.

“All of this is great if you’re a sophisticated high net worth individual who can do an allocation into a venture capital thing,” she said.

“But if you’re more the mainstream just wanting to get your exposure to growth assets through listed equity markets, life’s getting tougher because you’re just getting these over-levered, older-style companies that are gearing up their balance sheets and less of the innovation coming through because the innovation is happening off-market.”

The Tax Institute today confirmed with the Labor Party that proposed changes to negative gearing will apply across the board to all investments.

Tax Institute senior tax counsel Robert Deutsch said the federal opposition’s plans to introduce restrictions on negative gearing for investors if elected in 2019 have been clarified.

It was previously thought Labor’s negative gearing restrictions might only apply to property investments.

“However, the overall impact of Labor’s negative gearing proposals is not likely to be nearly as draconian as some sectors seem to be suggesting,” Deutsch said.

“The good news is that the proposed restrictions to negative gearing would apply on a global basis to every taxpayer.

“This means that individual taxpayers would need to look at the totality of their investments.”

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