The government wants to close “a loophole” which allows large corporations to buy back their shares at below market price using their excess franking credits.
Announced in the budget, the measure seeks to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the tax treatment of on-market share buybacks.
The government has now prepared and published exposure draft legislation giving effect to this measure, which, it said, will ensure that where a listed public company undertakes an off-market share buyback of a share or non-share equity interest, no part of the purchase price in response of the buyback will be taken to be a dividend.
Following the budget, Labor’s move drew a big response from the market, with many calling it a blindside.
But, in his address to the Institute of Public Accountants on Thursday, Minister for Financial Services, Stephen Jones, waived off criticism that Labor’s policy was about changing franking credits.
“Ordinary mum and dad investors will continue to receive their franked dividends,” said Mr Jones.
“Our change is only to align the tax treatment of on‑market and off‑market trades. That is fair and as it should be.”
At the time it was announced, Liam Telford, national tax technical director of RSM Australia, told InvestorDaily that Labor’s proposal could signal the “death knell” of off-market share buybacks.
“This is the second measure announced by the government in the last couple of months that targets franking credits — cynics would say that we are starting to see a pattern consistent with the ALP’s 2019 campaign against franking credits,” Mr Telford said.
The first measure, Mr Telford alluded to, was Labor’s pre-budget announcement which revealed its intention to prevent Australian companies from paying franked dividends to shareholders in circumstances where the Treasury believes that the fully franked dividends can be directly or indirectly linked to funding received through capital raising.
But on Thursday, Mr Jones said the measure not only “strengthens the integrity of our system”, but “it ends an unintended incentive for corporates to buy back shares off‑market instead of on‑market”.
“Dividend imputation is there to give companies a way of allocating tax credits to their shareholders when they distribute franked dividends. That purpose will remain.
“It is not there for corporations to exploit the tax treatment, at taxpayer expense, of off‑market share buybacks. Such deals can give preferential tax treatment to large institutional investors and often run into the billions of dollars,” Mr Jones said.
“Though relatively rare — averaging one or two a year — when they do happen, there is a very big budget impact.”
He gave the example of BHP, which in 2018 did an off‑market trade with some of its large investors to buy back $8.5 billion worth of shares.
“The market price on the ASX was $32.14, but BHP only paid $27.64 off‑market,” Mr Jones said.
This year, he noted, Westpac employed the same mechanism to get a discount on its $3.7 billion off-market share buyback.
“And last year, Commonwealth Bank got a discount on its $7 billion off‑market share buyback,” Mr Jones said.
He clarified that “this is not a criticism of the companies or the funds that have taken advantage of the loophole”.
“It’s not illegal, and corporations will still be able to issue special dividends,” he said.
The government estimates this measure will save the budget an average of $200 million a year.
“Budget repair is challenging, there are no easy choices,” the Minister said.
“But we remain committed to improving the budget to ensure the fiscal policy remains responsible and takes the pressure off the cost of living for families.”
The government is now seeking stakeholders’ views on the exposure draft legislation and accompanying explanatory material implementing this measure. Consultation is open until 9 December.
