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Are franking credits on the chopping board to help the budget?

Could franking credits be sacrificed to help the budget stay in reasonable shape during this difficult time?

The coronavirus is causing everything to be turned upside down. The Liberal government is signing up for huge budget deficits and large welfare policies. Now people like Geoff Wilson from Wilson Asset Management (which operates LICs like WAM Capital Limited (ASX: WAM)) has been talking about franking credits being put on the chopping block, but he thinks it’s a good system right now.

The AFR quoted Mr Wilson saying that “someone will have to pay” for the stimulus and that “everything is on the table”.

Reducing the effectiveness of franking credits was one of Bill Shorten’s signature policies so that people receiving Australian dividends wouldn’t get as much from the arrangement as before.

There are plenty of ASX shares that pay out huge dividends with franking credits attached. Shares like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ) and Woodside Petroleum Limited (ASX: WPL) usually pay big dividends. Though all of them may pay much smaller dividends this year.

So, what’s the government’s view on franking credits?

In today’s press conference the Prime Minister said the initiatives announced during this period will put great strain on the country, but it is vital. The commitments are large but he’s focused on making sure things put in place are temporary and don’t cause long tails of expenditure.

He specifically said: “What we have done is sought to calibrate these commitments consistent with what the country will be able to withstand and no, we’re not reconsidering franking credits and these sort of things.”

Foolish takeaway

It seems franking credits are here to stay, again. Not that they were officially in danger. Plenty of businesses may decide to cut their dividends in light of what’s going on. As always, we need to ensure we look at the business and the price side of things before the dividend.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.