Fund management guru Geoff Wilson, the chair of Wilson Asset Management, has responded angrily to proposed legislation that will stop companies paying franked special dividends funded via capital raisings.
As my Fool colleague Brendan reported, the new rules will also require investors and super funds to pay back franking tax credits attached to special dividends received all the way back to December 2016.
Wilson says it's a cash grab and the first step in dismantling the franking system, according to an article in The Australian.
Changed ASX dividend rules to disadvantage growth shares
Wilson said:
If you stop every growth company that raises capital from paying a fully franked (special) dividend, that's a big segment of the Australian corporate sector and puts growth companies at a big disadvantage.
It should have been off the table for a generation, for 30 years … this is the start of the dismantling of the Paul Keating-introduced franking system.
The retail investor will certainly be impacted by the retrospective nature of this. They'll get a letter from a company saying 'the dividend you got wasn't franked so you've actually got to pay tax on that'.
The government says the measure will save $10 million a year. But Wilson reckons it will be billions.
Wilson said:
Treasury thinks this will bring in $10m (a year) … but because of the broad wording of the (proposed legislation), and it really comes down to the tax office's interpretation and its ability to put pressure on large corporate companies, we think the figure could run into the billions by making it retrospective to 2016.
Wilson said he'd fight the proposed legislation with "the same amount of resources as we did in 2019".
He's referring to the previous federal election when Labor promised to abolish franking credit cash refunds. The Liberals dubbed it a "retiree tax" because it would have affected retirees the most.
What is the government's point of view?
The Federal Treasurer, Jim Chalmers, described the legislation as "a very minor measure", according to the article.
Labor says it merely closes a loophole companies use to pay out excess franking credits on their books.
The draft proposal says: "The object of the frankable distribution rules is to ensure that only distributions equivalent to realised profits can be franked".
The current loophole allows companies to use capital raisings to fund franked special dividends. This allows them to release excess credits above their earnings in a given period.
Chalmers points out that the Coalition Government initially proposed the measure in 2016.
The legislation is now open for public comment until 5 October.
The proposed changes will not impact ordinary dividends. ASX dividend shares will still be able to pay special dividends without franking.
The S&P/ASX 200 Index (ASX: XJO) is down 0.22% at the time of writing.
