Townsville Bulletin

Franking credits build up for heavyweigh­ts


AUSTRALIA’S biggest listed companies have built up a staggering $66.4bn war chest of franking credits, adding almost $27.2bn since the start of the pandemic in early 2020.

The figures come from an analysis of financial reports issued by members of the S&P/ ASX 100 index, and show Australia’s top listed companies are building up a massive bank of tax credits for shareholde­rs.

It suggests shareholde­rs in major mining and banking stocks are in pole position to cash in on an anticipate­d dividend and buyback bonanza over the next few years.

Designed to eliminate double taxation of company dividends, franking credits are generated through the payment of corporate taxes and passed on to shareholde­rs when dividends are paid, allowing them to reduce their own tax liabilitie­s or, in the case of some self-funded retirees who pay little or no income tax, receive a cheque from the federal government to their value.

The incredible $27.2bn build-up over the past two years has been driven by soaring iron ore prices and restrictio­ns put in place by the banking regulator on shareholde­r returns to shore up the sector’s financial stability through Covid uncertaint­y.

Australia’s major listed iron ore miners – Rio Tinto, BHP, Fortescue Metals and Mineral Resources – saw their franking credit balance lift by a combined $19.17bn since June 30, 2019, representi­ng more than 70 per cent of the net gain made by the entire ASX 100.

The big four banks plus

Macquarie added $5.53bn to their franking credit balance over the same period, meaning together the banks and miners accounted for more than 90 per cent of the net gain made by the ASX 100.

The surge of additional corporate tax payments that has underpinne­d the build-up of franking credits over the past two years has undoubtedl­y put a smile on the face of Treasurer Josh Frydenberg, helping offset some of the more than $311bn cost of Jobkeeper and other Covid measures.

But the franking account balance also sits on the other side of the federal government’s balance sheet, as the cash returns to shareholde­rs with lower tax rates grow.

The Treasury refunded about $1.9bn in franking credits in 2006, with the figure more than tripling to $5.9bn in 2015.

Fund managers expect the franking credit balance at major companies to unwind quickly as the economy opens.

Michael Price, equity income portfolio manager at Ausbil, said he listed companies were unlikely to sit on their higher franking credit balances.


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