Franking credits giant boon for shareholders
THE amount of profit Australian businesses pay out to shareholders rather than reinvesting has surged in the decades since the franking credit system was introduced, according to new research.
In a report on the history of the nation’s stockmarket, Reserve Bank of Australia economist Thomas Mathews said the proportion of profit businesses paid out rather than reinvesting “increased substantially” after franking credits were introduced in 1987.
For the biggest listed companies, the payout ratio (the share of profit paid out in dividends) rose from a low of about 40 per cent in the early 1980s to between 65 and 80 per cent in the next three decades.
Before the dividend imputation reforms introduced by the Hawke-Keating government, corporate profit was taxed, and the profit then paid out to shareholders was also taxed.
The introduction of franking credits ended the process of double taxation, making it more attractive for investors to own shares and providing companies with an incentive to pay more franked dividends.
According to separate research by stockbroker CommSec, almost $30 billion was likely to have been paid out to shareholders in Aussie companies since the half-yearly corporate results season in February, compared to the $22 billion paid out in dividends the same time a year ago.
In last month’s federal election campaign, the Labor Opposition promised to unwind a reform to the dividend imputation system introduced by the Howard government in 2001.
Since then, shareholders without personal tax bills to offset had been able to receive franking credits as cash refunds, a benefit that Labor would have scrapped.
CommSec chief economist Craig James had previously said that since 2004, share prices had increased 91 per cent, but total shareholder returns had risen 265 per cent, and dividends or share buybacks accounted for the difference.
The RBA research paper also found little change among the biggest companies listed on the Australian share market in the past century. Six of the top 10 listed companies in 1917 are still among the top 10 now.