Australian Tax Office Excess Franking Credits: “When people next receive their dividend refund cheque from the government, remember the government has had to borrow that money”

The Australian Government's public debt stood at an estimated $541.73 billion and growing on 8 February 2019.

On 8 February 2019 in Sydney economist Stephen Koukoulas made a short three minute statement before the House of Representatives Economics Committee ‘inquiry’ into the Labor Federal Opposition’s policy to eliminate excess franking credits.

Excess franking credits are refundable to a shareholder who receives a dividend but has no tax liability to use those franking credits against. 

It is free money - money for jam - granted to shareholders for the last eighteen years under a Liberal-Nationals federal government tax policy.

By 30 June 2015 these excess franking credit refunds were costing the federal government an est. $2.54 billion annually and, are currently estimated to be costing the Australian Government well in excess of $5.9 billion each year.

Below are the notes Koukoulas used for that oral Statement which boiled down to two issues, the cost to the budget and how the policy is distorting investment decisions from investors and lazy financial planners.

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Tax policy is always riddled with trade offs.

No government wants to tax anyone more than it needs to, nor should it impose a tax regime that is unfair if it means cuts to services, a heavy tax impost on others in the community or adds unnecessarily to the budget deficit and government debt.

Labor’s policy on refundable franking credits will impact the budget bottom line by more than $5 billion a year.

Without the change, this $5 billion, or $100 million a week, means less money is available for the government to provide health care, roads, education, disability assistance and defence.

It is disconcerting that every dollar of refundable franking credits is currently borrowed by the government.

When people next receive their dividend refund cheque from the government, remember the government has had to borrow that money:

… every cent of it.

… this adds to government debt that will have to be repaid one day in the future by our children and our grandchildren.

I think this is unfair.

The policy also distorts the way we Australians invest our savings.

Many investors put money into companies that pay high, fully franked dividends regardless of the underlying strength or potential of that business.

Look at Telstra. The banks.

It is blind, uneducated and lazy investing recommended by lazy financial planners.

It is only the dividend, not the underlying strength of the business, that guides the investment decision.

This is one reason why the Australian stock market is still 15 per cent below the 2007 peak, while the US, German and Canadian stock markets are substantially higher.

None of these countries have refundable franking credits.

Investors in those countries provide finance to dynamic growth companies and strong businesses.

In Australia, such companies are often shunned by investors because they pay no or low dividends.

Investors instead place their money with what are average firms that structure their businesses according to tax policy distortions.

Imagine if the ASX was at 10,000 points, not the 6,000 point level prevailing today?

I suspect the concerns about dividend refunds would be trivial.

The Australian tax distortions mean that local entrepreneurial firms have less access to local capital.

The money is instead tied up in dinosaur companies paying high dividends.

It is one reason why so many of the 21st century technology and start up firms in Australia head overseas to pursue their business models.

This costs the Australian economy growth and jobs.

With the policy change on refundable franking credits, there will be a greater incentive to invest in companies and other assets for reasons of growth and entrepreneurial flair…

… which will be a positive for the economy and jobs …

… and it will be good for the long term future of Australia.

Thank you

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