Opposition to the removal of refundable franking credits

During Argo’s recent national roadshow, the issue most frequently raised and of greatest significance to our shareholders was the Australian Labor Party’s proposal to abolish refundable franking credits. Shareholders are deeply concerned and confused about the negative impact the policy would have on them.

Many shareholders expressed anxiety arising from the current uncertainty surrounding Australia’s imputation system. Shareholders have genuine fears about the effect on their standard of living if they cannot receive franking credit refunds. Many shareholders have saved diligently to ensure they are financially independent of government. They have relied on the current regulatory framework which, for almost two decades, has provided for the refundability of franking credits.

Tax neutrality and fairness

Refundable franking credits are fundamental to the principles of tax neutrality and fairness.

In Australia, a company pays tax on its taxable income. That after-tax income is then distributed to the company’s owners (its shareholders) in the form of dividends. Franking credits are attached to those dividends in recognition of the tax already paid on that income and avoids double taxation. A shareholder can use the franking credits to offset tax payable. If the shareholder has a zero or low marginal tax rate, they are entitled to a refund. Refundable franking credits rightfully recognise that a company in which they are a shareholder has already paid tax on their behalf. Abolishing the refundability of franking credits would imply that a shareholder with a zero marginal tax rate has paid no tax or that a shareholder with a low marginal tax rate has not paid their fair share of tax. This is incorrect.

Advocating for shareholders

Argo is strongly opposed to the ALP’s proposal to remove refundable franking credits. We believe franking credits should have the same value to all shareholders, irrespective of their marginal tax rate.

If enacted into law, we believe the ALP’s policy would have a fundamentally inequitable impact on individuals and SMSF investors. It would have a particularly deleterious effect on low and middle-income earners.

We have taken a number of proactive steps to advocate on behalf of our shareholders who are likely to be affected, including making a formal submission to the House of Representatives Standing Committee on Economics’ Inquiry into the implications of removing refundable franking credits. You can view our submission here. Shareholders have also been represented through submissions made on behalf of Argo by two LIC associations – the Australian Listed Investment Company Association (ALICA) and the Listed Investment Companies and Trusts Association (LICAT).*

Appearance at Inquiry hearing

More recently, Argo’s Managing Director, Jason Beddow, was invited to appear at one of the Inquiry’s public hearings in his capacity as Chairman of ALICA. At the hearing in Melbourne late last year, Jason told the Inquiry’s Committee Members about the concerns raised by our shareholders and described the stress and anxiety caused by the proposed changes to the franking system. He also highlighted that the removal of refundable franking credits unfairly extinguishes the value in imputation credits for some investors, but not others.

In the lead-up to the federal election, Argo will continue to consider how to best advocate for our shareholders with respect to this issue.

* ALICA was formed many years ago by some of the traditional LICs operating at the time. LICAT was recently formed and also includes many of the newer LICs and listed investment trusts.