Bank investors eye franking prize

Investors in bank stocks could be due for a franking boost.

Summary: Australian investors in bank stocks could be due for a boost after Tony Abbott unexpectedly moved to reform a trans-Tasman agreement.
Key take-out: Currently, the dividends streamed from the New Zealand arms of Australian companies are not eligible for franking credits for their Australian investors and vice versa.
Key beneficiaries: General investors. Category: Shares.

Prime Minister Tony Abbott has agreed to include the issue of mutual recognition of franking credits with New Zealand in the federal government’s forthcoming Tax Reform White Paper.

Australian bank investors could save up to $900 million in tax credits if Australia were to recognise franking credits on earnings from the New Zealand arms of the “big four” banks.

New Zealand Prime Minister John Key announced the move after he met Abbott in Sydney on Friday, and after their two Cabinets met jointly to discuss common economic, taxation, trade and welfare issues.

Key said soon after Abbott’s election last year that mutual recognition of tax credits was high on the New Zealand Government’s agenda, given New Zealand saw significant benefits for Australian investors in New Zealand and the potential for higher Trans-Tasman investment.

Investors in Australia’s big four banks have the most to gain of any Australian investors if Australia were to recognise tax paid in New Zealand. The New Zealand units of ANZ, CBA, NAB and Westpac paid a combined $NZ1.330 billion in tax in the last financial year, and they sent back a total of $NZ1.269 billion worth of dividends to their Australian parents.

The four New Zealand banks made over $NZ4.3 billion in pre-tax profits in the last financial year.

Currently, the dividends streamed from the New Zealand arms of Australian companies are not eligible for franking credits for their Australian investors and vice versa. The Australian government has much more to lose from mutual recognition than the New Zealand government, given Australian investors have much more invested in New Zealand than the other way around.

A 2012 study, by the New Zealand Institute of Economic Research and Australia’s Centre for International Economics, found mutual recognition of tax credits would boost trans-Tasman GDP by a net $NZ5.3 billion by 2030, through increased investment, although most of these benefits would accrue in New Zealand.

The study found that the current double taxation of earnings meant Australian equity investors in New Zealand faced an effective tax rate of 60%, while New Zealand investors in Australia faced an effective tax rate of 53%.

Abbott’s agreement to include franking credits in the White Paper was not expected, given previous Australian governments have baulked at changing the policy, which has been forecast to reduce Australian and New Zealand tax receipts by as much $NZ1.3 billion a year, with Australian losses making up 75% of the total.

Key acknowledged in a joint news conference with Abbott that any change may not be quick, given the pressures on Australia’s forthcoming Budget.

“We’re also very pleased that the decision has been made to send to the tax review the issue of imputation credits, and the prime minister made it quite clear, actually, that Australia is interested in that issue,” Key said.

“Today may not be the day, from a financial point of view, to complete that, but it’s very much an alive issue if we want to truly have an Australasian capital market which is the desire of both countries,” Key said.

“Big Four” banks

% of total revenue from New Zealand

ANZ

15.3%

WBC

11.4%

CBA

9.9%

NAB

8.7%

Source: Bloomberg

David Gilmour adds:

Australian bank and tax analysts have welcomed the news that fresh tax reforms could unleash new inflows for Australian investors in bank stocks.

The outcome would be exceptional for Australian bank investors as each of the big four banks have major operations in New Zealand, a leading bank analyst explains. Over the last decade the major banks have all built considerable operations in New Zealand, with CBA running ASB and Sovereign, NAB running Bank of New Zealand, ANZ running EFTPOS New Zealand and UDC Finance, and Westpac running Westpac New Zealand.

Analysts believe the reform of the Australia/New Zealand franking credits issue would assuage concerns that the banks’ increasing offshore exposure would reduce the amount of future dividends that could be franked.

Market observers suggest ANZ would be best placed to benefit from the mutual recognition as it has the most ambitious overseas growth plans. ANZ plans to derive between 25-30% of its revenue from Asia by 2017, up from 20% currently.


This article first appeared in Banking Day, and is reproduced with permission.