Westpac will pay its interim dividend nine days earlier on June 24 in a strategy that appears to be designed to get around Labor’s promised changes to the franking tax policy. A Labor government, if elected, will introduce the changes from July 1 this year.
Westpac and the other big banks pay some of the biggest dividends on the ASX. Westpac’s dividends are typically 100% franked with Australian franking credits at the company tax rate of 30%. Westpac will pay another dividend this year on December 20.
Investors could expect other companies to follow Westpac’s move. Already one of the main themes of the reporting season up to February 2019 was much larger than expected dividends with 21% of ASX 100 companies delivering a higher dividend, according to UBS.
Labor has signalled it will close down the concession created by John Howard and Peter Costello, and return to the arrangement first introduced by Bob Hawke and Paul Keating – so that imputation credits can be used to reduce tax, but not for cash refunds.
Labor is arguing that Australia is the only OECD country with a fully refundable dividend imputation credit system and it costs the budget more than $5 billion dollars a year.
Self-managed super funds are a major beneficiary of the dividend franking practice, with 50% of the benefit to SMSFs accruing to the top 10% of SMSF balances, says Labor. It claims that some SMSFs receive cash refunds of more than $2.5 million a year.
Chris Bowen, shadow treasurer, says more than 92% of taxpayers do not receive a cash refund for excess imputation credits and won’t be affected at all by this change.
But there is plenty of hostility from Australian investors about the proposed move. A recent survey by Australian Foundation Investment Company of 14,362 of its shareholders found that many are distressed and worried about how to replace the income from franking credit refunds.
Mark Freeman, managing director at AFIC, says, “The feedback we have received from our recent shareholder survey has been overwhelming. The refundability of franking credits has been a part of the current tax system for over 18 years now. It has been a key element in encouraging individuals to save for their own retirement rather than relying on government support.”