Myth-busting dividend imputation
The decision to introduce dividend imputation has provided an unforeseen benefit for Australia, perhaps one that is still not fully appreciated by policy makers – it has made Australian companies manage their capital more efficiently. That makes them sounder investments.
Yet this benefit appears to be in jeopardy because the debate about the value of dividend imputation is obscured by myths. This submission by Fidelity seeks to puncture these illusions in the hope that policy makers will possess the information they need when judging the effectiveness of a tax system that has served Australia well since 1987.
Myth 1: Franking is an anachronism; Australia should modernise its tax structure.
Reality: Franking’s primary benefits – avoiding double taxation, removing the incentive for high levels of corporate debt – remain valid.
Myth 2: Franking is all about the tax refunds.
Reality: Franking’s most important influence has been on capital allocation within the economy.
Myth 3: Australia has enjoyed extended economic growth. Franking has played no part in this.
Reality: It is likely that franking has contributed to Australia’s lower economic volatility.
Myth 4: If Australian companies have higher payout ratios, it must be at the expense of capex – but we need more investment now, not less.
Reality: Relative to US companies, Australian companies pay higher dividends and also invest more; the key difference is that Australian companies run their balance sheets more efficiently.
Myth 5: Franking promotes higher payouts, which reduces reinvestment and lowers future growth.
Reality: Higher payouts indicate higher future earnings growth. There is no income-growth trade-off.
Myth 6: Franking turns the Australian stock market into a high-yield, low-price-return market.
Reality: Higher dividend-paying share markets deliver higher price returns – even at the aggregate level. There is no income-growth trade-off.
Myth 7: Abolishing franking would boost government revenue.
Reality: Franking creates integrity in the corporate tax base. Removing franking would give rise to behavioural changes that could significantly erode the corporate tax base, leaving the national accounts – and retirees – worse off.
Myth 8: Franking disadvantages Australian companies that earn significant overseas revenue.
Reality: These companies benefit from the positive side effects of franking; empirical evidence does not suggest a disadvantage.
Myth 9: Franking creates a risky equity-market bias for retirees.
Reality: Franking does create a bias toward high-quality, well-managed, cash-generating equities; this will help keep self-funded retirees off the aged pension.
Myth 10: Franking creates a risky home-market bias for retirees.
Reality: Franking results in well-managed, high-returning, lower-volatility companies that are justifiably attractive to domestic and international investors.
Myth 11: Franking makes Australian shares less attractive to overseas investors.
Reality: Corporate tax levels do not typically feature in investment decisions by foreign investors. Quality of operations and management are more significant, franking supports these.
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