Sneaking through a $1 billion tax hike
The problem with becoming a nation of shareholders, as we did after the Keating compulsory super reform, is that not every working Australian understands what’s in their retirement portfolio, or how market and regulatory conditions, and fees, affect their retirement wealth.
If we all understood that, the management of Australian retirement savings would look a lot different – something Business Spectator’s sister publication Eureka Report, and a number of other personal finance publications, try to address over time.
The terrifying question for the Coalition, which has been sprung for taking 1.5 per cent of dividends distributed to help fund its paid parental leave scheme, is how many voters will understand what this means.
Had the Coalition simply cut company tax by 1.5 per cent, without then topping that up again with a 1.5 per cent ‘levy’ (which is really a tax), all shareholders would be better off. The companies they own would have extra profit, extra money to invest. Shares would in most cases increase in captital value, as well as produce larger distributions down the line.
However, the 3200 companies that will be slugged with the levy represent nearly 80 per cent of Australian company earnings. So the SME sector gets a boost with a tax cut starting in July 2015, but big companies actually go backwards (How did Rudd miss Abbott's giant tax grab?, August 22).
That’s because to give their shareholders the same yields they’re used to, they will have to dip into funds otherwise earmarked for reinvestment in the business (or, dare one say it, directors' pay rises).
But what is the scale of the problem? Estimates so far have varied between $1.6 billion a year and $700 million a year. So this morning I borrowed the Business Spectator calculator, wiped off the doughnut crumbs (and yes, I’m looking at you, Mr Gottliebsen) and crunched the ASX numbers for our top 10 listed companies by market cap.
The table below shows not the total tax that companies will pay towards the paid parental leave scheme (that is a much larger sum equal to 1.5 per cent of earnings), but the amount shareholders will lose from dividend distributions to compensate for the 1.5 per cent decrease in available franking credits.
If that sounds confusing, each of the shares listed below used to get a 30 per cent credit, because the company had already paid 30 per cent company tax – the company can’t pay the same tax twice.
Under the Coalition’s plan, the credit the shareholder gets will be 28.5 per cent, but the cost to the company will still be 30 per cent – it’s paying 28.5 per cent company tax, plus the 1.5 per cent levy.
Many readers will be rolling their eyes at what a simple proposition this is to understand. But is it really?
Voters need to work out their own shareholding, and strip out 1.5 per cent of their last year’s dividend payments to work out what they could potentially lose. After all, the companies they partly own have to find that money from somewhere, and if dividends aren’t touched, that will come from the firm’s capex or opex budgets.
A precise figure for each company is always open to a small amount of interpretation. In the table below, I have used the past year’s actual dividend payments as the basis of calculations – and of course, these can rise or fall depending on market conditions. For one share, Woodside, I have ignored a higher than usual special dividend to keep the estimate conservative.
So, the numbers are indicative. However, given that the top 10 companies on the ASX represent 50.6 per cent of the listed companies by market capitalisation, the total dividend hit caused by the Coalition’s tax/levy swap is likely to be around double the $511.5 million listed below. On that basis, the tax grab is worth around $1 billion.
The franking-credit problem has mainly been discussed so far in relation to retirees (A less-than-frank Coalition funding gap, August 23). However, nearly all working Australians hold some of the shares listed below in their superannation funds.
Hitting shareholders for an additional tax of $1 billion is, arguably, justifiable – particularly when it’s to position the vital societal role of motherhood at the centre of the economy, which is what Tony Abbott says he’s trying to do.
However, that is a different argument.
A $1 billion tax, disguised as a difficult-to-understand franking credit tweak, looks like too-clever accounting by far. Or rather, it looks like a trick from a group of politicians who wish to form the next federal government. That’s not a good start.