The Institute of Public Accountants (IPA) has declared its support for the federal government’s proposed change to the dividend imputation system with regard to off-market share buybacks.
Speaking at the accounting body’s National Congress 2022 on the Gold Coast last week, IPA technical policy general manager Tony Greco told delegates the organisation is supporting the change as the current off-market share buyback practices produce outcomes the franking credit regime was not designed to deliver.
“With an off-market [share buyback] the company that is buying the shares is able to provide a capital component which is quite low and a fully franked dividend which is quite large [as consideration]. That’s what the experience has been to date,” Greco noted.
“So effectively that franked portion of the dividend carries those franking credits and they are highly valuable to a select few of [the company’s] shareholders.”
He pointed out the practice disadvantages one group of Australians in particular.
“The only loser is the taxpayer because of the unnatural distribution of those franking credits – they all go to the group that either pay no tax or pay less than 30 cents in the dollar and are entitled to a refund of the franking credit,” he noted.
“That is unnatural. That’s not what the imputation system was designed to do because imputations belong to all shareholders and when a company pays a dividend it’s pro rata – everyone gets a share of those credits.”
According to Greco, shareholders who do not participate in the buyback are not necessarily disadvantaged as they can benefit from making further stock acquisitions at the discounted price established by the buyback process.
Further, he said changing the share buyback process will not diminish a company’s ability to manage its capital as the declaration of special dividends or offering a capital return will still be allowable if the change to the current share buyback process is implemented.
“That’s why we took a public interest [position] and said this costs a bucket-load of money [and] it’s not appropriate that the imputation system generates this result,” he said.
