Are franking credits hurting Australia’s economy?

Correct my logic if necessary. If a company pays tax at 30% and distributes all its profits to non tax paying individuals or super funds ,who get a franking credit refund, then the tax department ends up getting no tax from either the company or the individual. Am I correct?

"Am I correct?": Yes, if grossed up income of all dividend recipients is less than their Tax Free Threshold.

The obligated amount f tax is being paid regardless of franking credits or not, so no, you're not correct.

As a shareholder the company you receive profits in the form of dividends from the company and you pay the applicable tax required on those dividends. If you're taxable position is you don't need to pay tax, you get any tax paid by the company on your behalf back.

As for the ATO not getting tax on that, indirectly they do from those that use that dividend and any associated franking credit to fund their lifestyle through GST and other economic activity the mney flowing through the economy provides.

The misinformation about franking credits is staggering and, quite frankly, so irritating. And during the Shorten campaign a lot of silly misinformation was promulgated by the media, including the ABC whose commentators should have understood the system or at least informed themselves.
Franking credits are NOT free money. Or RORTS.
FCs must be added to taxable income, so the tax payable is based on the Grossed Up Income. Then the franking credit is deducted from that grossed up taxable income after the tax is calculated. The tax owed depends on the individual's tax rate.
The tax owed on a higher taxable income will be reduced by the value of the franking credit, even to zero. Then the higher tax payer pays no tax at all.
If the low income tax rate results in the franking credit being surplus to the tax owed, then it is REBATED/REFUNDED to the taxpayer just as a PAYG taxpayer gets a refund if it turns out they have had too much tax taken out of their PAYG salary.
This means ALL taxpayers pay the correct amount of tax based on their taxable income and tax rate.
As others have said Keating stopped the double taxation of dividends. And Costello ensured that all taxpayers, including the low income payers received the appropriate refund of the unused franking credits. And he was a Liberal, whereas Shorten wanted to disadvantage low income shareholders. Now go figure: Costello was helping the voters that Labor claim to support. No wonder Shorten lost the election.
And why shouldn't low income earners invest in shares, especially when they can't afford to buy a big asset like a house. A low income taxpayer, whatever their age, can buy a hundred dollars or so of shares so building up a portfolio over time. Many young people found this out during Covid.
I agree with the person who said it would be great if 100% of the dividend was given to the shareholder. As it stands, the 30% (average FC percentage) is held by the govt until the taxpayer submits their return. The govt gets the interest on that money which rightly belongs to the taxpayer. The same applies to a PAYG low income taxpayer who doesn't get the refund until the tax return is submitted.
The dividend/franking credit system has definitely encouraged ordinary Australians to invest in public companies, thus stimulating the economy. They invest in businesses unlike the many people who invest in real estate driving up house prices so young people can't afford a home in which to live. Many of those people flip houses, living in them long enough to avoid CGT. Investing in shares in Australian businesses provides private capital for them to invest. Surely, this must increase productivity and the economy. As that oft (too-oft) quoted Warren Buffet said, when you buy shares in a company, you become a part-owner. Buffett emphasizes this perspective to encourage investors to think like owners and invest for the long-term, rather than short-term day traders. And, yes, shareholders, however small, deserve to get a return on their investments via dividends. They should not be forced to sell out of the business just to get a capital return on their investments.
The power of compounding through reinvesting one's dividends including the franking credits is a certain way to future wealth as many retirees have learned. Many of them hold CBA, Telstra and Woolworths since they were first floated, collecting the dividends along the way. Now they have a nest egg for their old age.

BTW, dividends, including the franking credits, are paid from company profits. So they are the tax the company owes the govt. So any company paying dividends is paying tax. Many companies, especially small caps, pay no dividends because they pay no tax. When a company starts paying dividends you know that company is likely to continue to grow its business and vice versa.

It seems to me the article is putting the proposition that franking credits distort the investment cycle and business performance based on evidence that is, at best correlation, and at worst confirmation bias. Not all companies that are available for investment pay dividends and the article seems tied to the ASX 200. Since we are talking about incentives and behaviour, perhaps we would be better to focus on boards that approve executive pay incentives on share price in order to “align” their attention with those of shareholders. This might be a better explanation of this rent seeking behaviour, however, these executives are also responsible, along with the board, for making decisions that will enhance the competitive outputs of their organisations. Since the ASX200 is the greatest source of franked dividends and industry superannuation funds are their most influential shareholders, perhaps the problem is not with the run of the mill investor but within the superannuation ecosystem distorted by large industry funds.

Hi Jan,
I worked in the accounting/tax profession in theU.K. during the '50's and '60's Dividends were received with a franking credit. The franking credit was viewed and accounted for just like PAYE tax deducted from wages. Dividends and wages were always shown gross. Dividends received were analysed under the headings Gross, Tax and Net. Simple, no confusion.

With all due respects to the author, my impressions is that he barely worked in a private enterprise or ever has been a private investor, may I say he more likely be very fortunate always employed with a high paying cushy positions in big corporations. I sincerely apologize if my guess has offended him.

James,

I think your comments reflect more on you than me and isn't helpful to the discussion.

This is costing the Government a lot of money, all of the tax paid by the company for dividend distribution is returned to the shareholder in full as a franking credit if their income is below the tax-free threshold. This cohort is large, including pensioners, retirees, people on low income, people with disabilities and others, they still receive the full dividend distribution plus the company tax that should have been withheld by the ATO. Just to press the point, if a company's shareholders were this cohort above, the government would retain zero from the tax paid by the company, it would all go to the shareholders. How dumb is that?

"This is costing the Government a lot of money":
The alternative, no imputation of tax, would cost shareholders a lot of money.

Imputing tax to employees is costing government much more.

Should employers pay tax on employees wages and employees pay tax on their net wages?
That would not be dumb; that would be uproar.

I think its brilliant. Companies are just a pooling vehicle and their earnings should be taxed at the tax rates of those who've put capital into the pool.

If there's a revenue issue because of the number of those contributors who are taxed at zero or low rates then THAT is the problem, not the tax policy that attributes their share of company earnings to them.

I say "if" intentionally because last time I looked into.it (admittedly a few years ago now), the average tax rate paid by shareholders was just over 30%. Yes, there are retirees on zero tax but there are lots more unit holders in super funds at 15% and lots outside super who pay 30% or 47%. So there isnt actually a problem, as if company earnings don't end up getting taxed. They do.

And they'll get taxed more once Div 296 comes in, though it won't look like it to folk not interested in how tax policy actually works.

Vic, this piece I did a couple of years ago explains why there is actually no leakage of revenue due to franking credits.

https://www.firstlinks.com.au/franking-credits-back-labors-sights

Thanks Tony. Great data, and you nail it near the end when you remind people that there are as many high tax bracket shareholders who pay more than the company tax rate as there are zero tax payers. As I said, last time I checked, the average tax rate paid by shareholders was pretty close to 30%, so company profits ARE taxed at the company tax rate after all. Your data shows the same thing from a different angle.

What do you mean the full dividend distribution? A company pays a $700 dividend with the $300 credit withheld. The shareholder gets $1000 of income but only receives $700, just like wages withheld. Would you donate your wages tax refund back to the Government just because your income only came to $15000?

With all due respects to your comments, I must say your name calling on private investors is totally disrespectful and unprofessional. It is called double taxation, if the income of my investment has been taxed at 28% rate why I should be taxed by 30_35% against. As an Australian, i take great pride that Australia is the only country that does not double tax income for its citizen, that significantly reduces the pension burden from the government. Country like Norwegian, claims the government look after all welfare needs for pensions but tax corporations 75% and 50% income tax, it is a taxation for communism utopian, do you like or love Norwegian taxation?

VIC, you should know that companies pay tax on all their profits, not just the bit they distribute as dividends.
Of the profits distributed as dividends, a significant portion goes to foreign investors who cannot use franking credits either to pay their tax or claim a refund. That makes sure that foreign investors always pay tax in Australia at the company rate, because it is extracted before they got their dividends.
Of the dividends distributed to Australian shareholders, anyone who pays tax will pay tax on their grossed-up income at their marginal rate. That way, tax is paid at their marginal rate on their share of the company profits. Their taxable income includes, not just the portion they received as a cash dividend, but also the company tax already paid.

If you disapprove of franking credit refunds, you need to explain why churches, charities, universities, unions, hospitals and pensioners should suddenly start paying tax on income from shares but not on income from other sources.

The author is mixing up two unrelated concepts, namely, franking credits and dividend payouts. To a profitable company paying a dividend but in need of more cash to fund investments, the question of franking credits is irrelevant. It has the simple choice of maintaining or lowering its dividend payout percentage.

He isn't, actually. James is proposing that the imputation system has resulted in higher dividend payouts than would otherwise be the case. He's linking them, not confusing ("mixing up") them.

I don't think that, of itself, it has done that. There was a lot else going on in the mid-80s that resulted in much higher investment in shares by retail ("mum and dad") participants (e.g. privatisation of high profile entities Telstra and CBA). I suggest that it's that retail demand that resulted in higher dividend payouts on average.
There was also other tax policies like the introduction of capital gains tax at play.
I don't think imputation has stymied capital investment by companies - I mean look at the huge investment in new ways of banking that one of the high dividend companies, CBA, has undertaken over the years.
But it is a question worth asking and should be answered by much more serious econometric work than the simple anecdotes and impressions that are being shared in the comments on James' post - including the ones I've shared in this one!

Not sure it’s a black & white answer / analysis to be honest. Hypothetically let’s say franking wasn’t introduced what would of listed companies done,
made empire building acquisitions overseas ? The Australian corporate graveyard is full of dud acquisitions (eg: Brickworks, BHP, RIO, National Bank, Wesfarmers etc etc) some work (CSL) but many don’t.
On the other hand many companies have underinvested in technology as a consequence of chasing the 80-100% payout genie, look no further than the ASX (company) itself.
The other thing the debate(above) misses is it focuses on listed public companies not private ones both large and small. The wealth impact there has been enormous both positively and negatively.
Is it just a coincidence that Atlassian & (probably) Canva sought / (will seek) primary listings in the USA ?
Finally the current focus on “franked”
dividends today comes at a time when bank bad debts are next to zero & profits are cyclically high, the iron ore price is a long way from recent all time highs & passive investing in a concentrated “listed” listed economy has never been higher and is growing, the collateral consequences of theoretical analysis (based on recent history) would need to be thought through sensibly.

Conflation of (1) the level of dividend payouts and (2) dividend imputation is unhelpful. The questions are individual ones. Given the payout of sensible and sustainable company dividends that allow company growth, at what level should they be franked? If the answer is zero, why stop at shares; everyone should be taxed twice!

It's not conflation at all. The question is whether franking credits encourage greater dividend payouts? That's a logical question not conflation.

If you look at the XJO adjusted for dividends chart you'll see it performs as well as the SPX

Investor,

That's not right. The charts include dividends and the ASX trails the S&P 500

Tax minimization by wealthy boomers is one reason the Federal government is struggling to find enough money to pay for services Australians want and expect.
If older people want good healthcare then the money must come from somewhere. There is a lot of selfishness in the Australian community.

"If older people want good healthcare then the money must come from somewhere.":

From State / Territory taxes (GST, Property), private health insurance, patients.
Buy goods and / or services, own or sell a home: pay for healthcare.

Government is not struggling they are wasting money in almost every department.
Look at the NDIS and the rorts for example.
Furthermore the editor is doing the work of Labor and their Canberra fat cats in softening us up for removal of franking credits. The directionless Liberals will agree with this.
The real problem is Govt wastage at all levels in Australia ie. Federal, State and Local.
Their really is no accountability as it is getting worse and worse, just look at Victoria.
In the future the money hungry Govts will remove franking credits, install capital gains tax on primary residence, death duties and then raise the GST.
This is to appease the weak pollies who just waste money for vested interests. Furthermore the public now is conditioned to receiving handouts and the pollies will buy votes using this.
What happens then, well then we have a mega political bureaucracy surviving on taxing the people.
Does the word Socialism come to mind.

David, you obviously have never lived in a socialist country. You don't have a clue what you're talking about.

It's also not black and white regarding investing back into the business is better than dividends, taken to the extreme, Superannuation Funds are finding it difficult to use funds for growth, it is why a good portion of the funds money is used to fund infrastructure, purchase bonds buy shopping centres and office towers and get a return on investment that (yield) similar to dividends.

Expansion for expansion sake does not always return shareholder value and writedowns are common.

Then there is having the ability for the market to be able to absorb that excess cash looking for a new home via acquisitions.

Rules and regulations another issue to contend with, monopoly laws etc

If dividend imputation is world's best practice why hasn't the rest of the world adopted it?

"If dividend imputation is world's best practice why hasn't the rest of the world adopted it?":

Other jurisdictions have less sophisticated / effective means of reducing taxes on dividends for low incomers.

Example:
USA has 'Qualified Dividends' and a company tax rate of 21%.
USAn individuals are not credited with the tax deducted from their share of company profits, a tax of at least 21% on gross dividends (=profit) regardless of other income, whereas employees are credited with tax withheld by their employers.
Individuals with non-'Qualified Dividends' are taxed again; at greater than 0%. 'Double Taxation'.

Australians are credited with tax on gross dividends and tax on gross wages.
Individuals with an income less than the Tax Free Threshold pay 0% tax on both dividend and wage income.
Individuals with more than the Tax Free Threshold pay more than 0% tax on their total gross income.

Simply because others haven't undertaken the wholesale financial system reform that we did from the early 1980s on. Integration of the company tax and personal income tax systems was not just tax reform, but an element of systemic change to encourage what had been a moribund economy, including lack of engagement by "mums and dads" with investment markets, into a more flexible and modern place , with loads more savings available to companies with which to build equity.
Imputation is a brilliant policy that results in shareholders paying tax on their share of company profits at their own tax rate. Not just about giving low income earners a tax break on dividends, but high income earners paying 47%.
From what I've seen of other regimes, none of them achieve the outcomes that ours does.

Whether Firstlinks or elsewhere, recall reading article many many years ago about how Australian sharemarket had such high participation by ordinary folk opposed to rest of world at the time and was attributed to franking.

"Not just about giving low income earners a tax break on dividends, but high income earners paying 47%.":

Income earners paying 47% pay 47% with franking credits because franking credits are always $ 0+ making their taxable income, $ dividends plus $ franking credits (called grossing up), always more than just the $ dividends received from the shareholder's company.

Larger $ taxable income results in larger $ tax.

Warren,

What might be good for shareholders isn't so good for businesses?

Is the policy balance right?

Many people focus on the credit part of the franking credit, seeing it as some sort of gift or bonus from the taxpayer. They overlook the fact that franking credits are actually additional taxable income for EVERY shareholder (not just retirees), held by the ATO as a tax credit, and represent the company tax already paid before the dividend was distributed. That is why the dividend must be “grossed-up” to include the franking credit as taxable income. It would be more honest to quote the yield from Australian shares on a grossed-up basis, because that is the amount shareholders must pay tax on.

The tax payable on that grossed-up income depends on the shareholder’s marginal tax rate. Those on high marginal rates can use that tax credit to pay some or most of their tax bill. Taxpayers with a marginal tax rate of 30% find that the tax credit cancels out their tax obligation because all the tax credits are used to pay the their tax bill.

Low marginal taxpayers find that the tax credit is larger than their tax bill. They have taxable income on which too much tax has already been paid. Just like a PAYG taxpayer in the same position, they are entitled to a tax refund. The refund depends on their low marginal tax rate, not their age.

The additional income from the franking credit refunds explains their popularity with all taxpayers on low marginal tax rates. They include super funds, pensioners, unions, hospitals, universities, churches, charities and the Future Fund, but if franking credits were abolished, ALL shareholders would lose the additional income that franking credits provide, either to help pay their personal tax or as a refund from the ATO.

As Tony Dillion said years ago: Franking credits are not taxes never paid, they are income never received.

That’s why Bill Shorten lost the 2019 election. By withholding the refund unused franking credits, he signalled his intention to confiscate the income of some taxpayers, but only those who had insufficient tax obligations to absorb those tax credits because they happened to be on low marginal tax rates.

All strong points Jon. Also, I think terminology plays a large part as to why franking credits are misunderstood, and is why many people oppose them being refundable. They are often lumped in the ‘tax offset’ basket, and even the ATO refers to them as tax offsets. But tax offsets like LITO, carers’ offsets, and SAPTO, can reduce tax payable down to zero but not below zero. Any excess is not refunded.

Franking credits however, are not strictly ‘tax offsets’, but rather credits for tax already paid on one’s behalf, like PAYG withholding. Which is why they can have a refundable component. But thinking they are offsets and should behave like offsets is often what confuses people.

Tony, you're right. Just 'Franking' would do, avoids the misunderstanding as you say when other Offsets do not give rise to a refund. ATO could use 'Franking ' on Assssment Notices if a Franking refund, figure is on Cr side anyway so "Franking" as description is adequate.

Viewing franking credits in this way, namely as taxable income in the hands of the shareholder takes some of the wind out of the sail of the propaganda machine that prefers to paint franking credits as a gift from the taxpayer to the shareholder. Something similar happens when self-funded retirees are accused of receiving a subsidy from the taxpayer when in reality they are not only fully funded, they are also subsidizing the taxpayer by not drawing an age pension that their lifetime taxes paid for. Many also fund private health care further subsidizing the taxpayer by not relying on the public health system that their lifetime taxes paid for. The propaganda in each case is perpetrated to justify higher taxes to feed more spending.

How can there be a correlation of Productivity to what is merely a Tax collection method ensuring tax is deducted at source and then correct tax is applied to each taxpayer?
If business wishes to or has bought new equipment/technology to improve productivity, it is brought to account prior to calculation of Net Profit as we all know. Subsequent company tax due & taxpayer credits are irrelevant to those decisions, it's not theirs to consider at that point.
There could be an argument debating merit or not of Franking system that if tax credit is due to some taxpayers much later than when tax was deducted at source and so results in a sizeable credit refund, some may see it as having been 'enforced saving' and if managed without it prior to refund, on receipt place it on Term Deposit which expands what banks have available for loans to business too. If do year on year & over time they hear of new business worth investing in then they may use the fixed deposits to invest in that new businss. It's another side of coin to consider.

Interesting article and fascinating comments.
I'm old enough to remember the era before Keating and the commencement of Dividend Imputation. Companies were resistant to paying dividends, as their retail shareholders in particular, were not crazy about paying tax on taxed company profits. The solution was Bonus share issues - particularly since there was no CGT in this era.

Other point - I recall from my MBA days a favourite saying: "Equity is a PILLOW, Debt is a SWORD". That is, companies are sharper in their thinking if they were contracting debt for fresh investments. I don't believe anything has changed - why shouldn't the owners of a business expect to received dividends for placing their money at risk.

Chris, yes all interesting comments. Am bit off-piste but your saying of the Pillow & the Sword struck a chord as prefer they be sharp about both rather than sharp - er re debt since it's shareholder funds (equity plus retained profits of shareholders) they are dicing their sword over and as you said, shareholders expect return on risk so they need to be sharp about both but not slash the pillow. When I hear some CEO's, G.M.'s & Directors I feel they think it's pretend play money in Monopoly, some seem no idea of how a Balance Sheet talks to shareholders nor how to interpret it.

If you don't have dividends and associated franking credits to fund your lifestyle, you'll be selling those shares as they appreciate to fund your lifestyle.

Once sold to fund lifestyle, you'll never see gain from those shares again. They're gone.

Getting the franked dividends, or even unfranked dividends, you're getting income, keeping the shares and those shares, all being well and good will still appreciate over time and still be paying dividends.

Theoretically that sounds right but the fact is without dividends the growth in share price would increase by the amount of dividend not paid so yes while you would reduce your number of shares over time the retained earnings would offset those sales of the same value with share price appreciation.

That is impossible to work out.Tbe reality is easy to work out. Use the DRP and your 1000 shares bought in 1991 have grown to 6500 shares in a round number .So 6,500 X ~ $180,wonderful,exactly what I wanted to happen .CBA performed far better than I thought it would over that period.Round that and the shares are worth $1.2 million .

Don't use the DRP and you've got 1,000 shares worth ~ $180K.Spend the dividends on whatever you like. What leads you to think that if CBA didn't pay out dividends then 1000 shares would be worth more than $1.2 million. The CBA share price would be $1,200 or more.

There is no guarantee there would be equivalent or greater growth and there is also the issue with Share price volatility. Dividends are typically more stable than share price.

Share price can fluctuate quite a bit year to year where the dividend is typically more stable, having to sell your shares to fund your lifestyle on a bad year means having to sell even more shares or reduce standard of living.

Have a cash buffer for lean years is the common retort, my reply to that is why have cash in a lower interest environment if you can get greater return % wise with grossed up dividends?

James, I’d like to pose a simple challenge to the thesis, that franking credits per se have any effect on company performance, with a simple counter-example:
ProMedicus is one of Australia’s most successful companies in recent years.
It pays 50% of its profits as a 100% franked dividend, but its earnings per share are growing at around 40% per year.
Where is the negative effect of the franking credits?

Jim,

Great example. ProMedicus is a great business with a return on equity of 52%. These types of returns are rare, and if you're a shareholder, you'd ideally want them to reinvest 100% of their profits back into the business if they can achieve these types of returns. Paying any dividends if you can earn these returns is illogical, poor capital allocation, and you'd ultimately be worse off as a shareholder.

The question is why is it paying out 50% in dividends? Maybe it can't find good opportunities to reinvest that money? Fair enough. Though given the growth opportunities portrayed by the company, and factored into the share price, this should at least be questioned.

Let's take it to the extreme and say ProMedicus pays out 100% of its dividends. As a shareholder that's the worst decision that could happen right now and it would either indicate that the managers are poor capital allocators or the company's growth prospects are gone. In this instance, the company's valuation, currently 292x PE, would crater.

There are many ASX 200 companies with healthy ROEs (though not like ProMedicus) which have dividend payouts of +70%, and similar questions of them should be asked.

There's a reason why Buffett wasn't a fan of companies with high ROEs and reinvestment opportunities who paid dividends, and why Berkshire never paid a dividend itself.

Thanks for the response James, but you’re arguing against dividends, not franking credits. Where’s the franking credit problem?

Jim,

The issue is whether franking credits influence dividend payout ratios, and therefore business reinvestment.

So, would you agree with my suggestion yesterday, that the relevance of franking credits “is simply mechanistic, and they should have no effect on the economy, unless people, or companies, act irrationally because they misunderstand the process” - the irrationality you refer to being to sacrifice growth for the sake of dividends? (Which would be a sad reflection on boards if true).

Is it all in the mind? No, I don't think that, Jim. The mechanics changed in 1987 and that changed incentives and behaviour.

But if the franking credit scheme were abandoned and we returned to double taxation, the after-tax income received by shareholders would drop, and they would pressure the board to increase payout ratios to compensate - the opposite of the thesis of this article.

Lots of alternative models out there, Jim.

Too much Australian profits through dividends are being paid to offshore business...All of our top blue chip stocks are 60 percent owned overseas....Thanks....

"pays 50% of its profits as a 100% franked dividend":

Trailing Twelve Months Gross Dividend Per Share: $0.6714
Payout Ratio: 51%
Profit Before Income Tax: =(0.6714 / 51%) = $1.3165
Share Price: $276.81
Earnings Per Share: = (1.3165 / 276.81) = 0.476%

Worse than CBA. Underperforming 'darling'. Priced on 'Pie in Sky' meme narratives, not current performance.

To the critics of James' thesis, one question: if ASX companies continue to pay out +70% dividends, can business investment in Australia regnite in any meaningful way?

I'd argue not, and I think it validates the thesis. And that isn't a long bow at all.

I hate these types of “analysis”, where a single factor seems to correlate, hence it must cause the result.
1986 also brought in a capital gains tax, a major disincentive to long term investment. The main drop in investment was in the early 1990s, which corresponded to a recession, and investment slowly recovered to pre 1990 recession levels. But of course you arbitrarily rule an average across this recovery period and show a step down in the average rate of investment.
The economy has switched from manufacture to services and the CGT has discouraged large scale investments. The major banks have generated tens of billions in annual profits but have failed in every attempt to expand into foreign markets or broaden services (financial/investment advice). The only worthwhile investment is the CGT free family home, and because of this driver of price increase, investment properties in a market with a supply squeeze in desirable locations.

Paying large dividends is an acknowledgement of management failure and economic reality. Management (outside of mining) have continually failed to get strong returns from major capital intensive projects and our economy provides very few opportunities for success.

Paying dividends is the easy answer, and for most Australian companies it’s the best use of the profits given their track record of failure in expansion beyond their core success.

"The only worthwhile investment is the CGT free family home, and because of this driver of price increase, investment properties in a market with a supply squeeze in desirable locations.":
CGT free family home is the after inflation, after tax return rate setter for all risky investments.

"Paying large dividends is an acknowledgement of management failure":
Paying dividends is the only way of prising company tax out of Aunty ATO's clutch; dividendless share buybacks don't.
Otherwise the franking credits molder in ATO's franking account. About $500G presently.
Companies can make reinvestment of dividends easy with a dividend reinvestment scheme.
Shareholders can reinvest cashed franking credits.

Capital gains tax is 'intended' to not tax inflational capital gains.
Tax on other returns should be similarly 'intended'.

Then, why did dividend payout ratios explode since 1987 - just a coincidence?

What I hate is extrapolating of how bad companies are with their capital allocation. Plenty of positive examples too - look at international success stories like Goodman, Cochlear, Carsales, CSL, Ansell, Breville, Premier, Nick Scali on its way), Wisetech, and the list goes on.

Dividends exploded after the introduction of CGT because capital reinvestment got riskier. Companies couldn’t get the returns on investments and chose the easy way out, dividends.

I think companies and government have bigger problems than franking credits. Companies are moving services and production overseas because of prohibitive increases in land tax, insurance, water, electricity and gas costs etc. We cannot increase GDP per capita when work is exported to the cheapest cost country. GDP per capita will continue to fall as work becomes more casual and part time.

Had a longer comment but just decided - yeah, nah. Basically we have pretty mediocre corporate leadership in Australia, and government that seems to despise anything that can create wealth. They do their best to look after each other, but the country as a whole, rough end of the pineapple.

By law, companies pay tax on profits. They pay tax on all their profits, not just the portion of profits paid out in dividends. The company has absolute discretion over the deployment of the after-tax profit. It may choose to distribute this after-tax profit to its shareholders as a dividend or retain that capital to reinvest in the business. But shareholders have no guarantee that the retained capital will be invested wisely and not on some overseas acquisition frolic.

James is suggesting that company boards are succumbing to the demands of shareholders for franking credits and therefore increasing their payout ratio. Leaving aside what that says about the diligence of company directors, there are many examples of growing companies, with large appetites for capital with very low or zero payout ratios even in the context of franking credits. And that’s the point. Many of the examples about franking credits come from mature businesses with little scope for further growth, where the most sensible decision is to return the profits of the business to the owners of the business in the form of dividends. Surely the decision to retain profits for future investment is determined by a company’s need for capital rather than the tax returns of its shareholders.

Any analysis of productivity without any mention of high energy costs, high labour costs or restrictive industrial relations legislation, seems a bit short sighted. All of these issues are directly related to government policy. The government is just discovering that business investment is discretionary and it must evaluate risk and therefore depends on confidence, trust and the expected rate of return. In the light of the above headwinds it is hardly surprising that businesses have become very hesitant to invest. That is made worse by the government’s overt threats to tax personal wealth and inheritance.

Excellent article backed up by data. What is the key objective or problem to solve? And would better productivity result in fairer taxation that would promote sustainable re-investment?

Two errors in this story I can see- Firstly in the CSL example the franking credit is a maximum of 30% of the total, not 50% in the example. If their income was $1500, the shareholder would get paid $1050 (70%), and the franking credit would be $450.
Second error is in your understanding of the four pillars policy with the banks- it doesn't stop other competitors coming in, it stops those big 4 from taking over each other. It maintains competition, not prevents it as you claim.

"the franking credit is a maximum of 30% of the total, not 50% in the example":

Not maximum rate.
Usually same as company tax rate but can be more or less.
Limited to company franking account balance being >= $0 else nasty fines.

If removing franking credits can potentially improve productivity then why don't we go a step further, by removing personal tax completely will surely incentivise people to work harder. Companies can pay higher wages to workers to reduce their tax liabilities and increase disposable incomes of their customers, thus making a positive feedback loop.

Why not just legislate that there is no tax payable on dividends in the hands of the recipient?
What the company pays the shareholder is what they get as non-taxable income from that source.

Because then shareholders on the 47% marginal tax rate wouldn't pay that rate on their company profits income.

The whole point is to end up with individuals paying tax on all their income at their tax rate. Although so much of the discussion is about 'refunds' to those who have a zero tax rate, the actual average tax paid on company profits ends up at around 30% because that's approximately the average tax rate across all tax payers. It means that those on higher tax rates pay more than the company tax rate. In this way, the imputation system is fair.

“In this way, the imputation system is fair”

I think it’s progressive rather than fair.

Fair is a perception , which changes with personal circumstances - I can’t define “fair” in a way that would be accepted readily.

Greg, its fair in the sense that people with the same income pay the same tax. I wasn't commenting on whether the degree of progressiveness was pitched right (fair) or not.

This article repeats fiction and innuendo created during Labor's failed attempt to win government a few years ago. I quote:

"In 1987, Treasurer Paul Keating created the dividend imputation scheme to do away with the government’s double taxation.

The Howard Government expanded the dividend imputation scheme in 2001 so taxpayers with excess imputation credits could get refunds from the ATO."

It sounds like Keating created dividend imputation, & Howard had the idea of refunds. The truth was quite different:
The whole notion and process was initiated by the Fraser government about 10 years earlier. The reason was to eliminate double taxation, which was preventing many australians investing in our own companies and perpetuating an unhealthy amount of foreign ownership in Australian public companies.
Fraser set up the Campbell Commission, which, after a long and exhaustive process, came up with the brilliant and entirely equitable system which we mow have.
However, because the process was so novel, they recommended that the new system should be implemented in two separate steps. The Keating government made the first step, with total Liberal Party support; around 10 years later the Howard government set the second step in place, with total Labor Party support.
The principle involved is that profits should be taxed in the hands of the business owner. It applies to all businesses - large and small - not just public companies.
The working is exactly analogous to PAYG tax: the tax cannot be calculated until Financial Year end. Franking Credits are not unpaid tax, they are profits withheld. They are added to the individual's taxable income in order to calculate the correct amount of tax.

Ken,

I still don't understand how the quotes are fiction and innuendo.

James

James,
I remember being very affected by the descriptions repeated endlessly by Shorten and Bowen. They gave the impression that Keating thought up and implemented an improvement, which was later exploited by Howard in the service of fat cats.
They claimed at the time that any Franking Credit return was "a gift" from the government. From conversations with anyone who would listen to me, it was apparent that very many people accepted their description, which was repeated word for word, very many times.
The fiction was that Labor and Liberals did two separate things, with different purposes, when in reality they were both implementing one policy and were in total agreement on it.
The innuendo was that Keating did good for the country, while Howard was looking after the wealthy.
Ken

This doesn't address the main question James has asked, but there still seems to be quite a bit of confusion about the what and why of dividend imputation and franking credits. These extracts from my piece in 2019 on the imputation system (https://www.firstlinks.com.au/basics-franking-credit-refunds-fair) might help:

Let's start by going back to the fundamental principle behind dividend imputation, which is to ensure that income is taxed once by those who are obliged to pay it.

If people who have a zero tax obligation do not received franking credit refunds, then they have paid tax on income when they should not have. This results in them paying more tax than someone who earns the same gross income.

To illustrate, consider the following three cases.


Person A does a little bit of part-time work that earns $17,500 a year, just under the income tax threshold. They don't pay tax.

Person B is semi-retired, but runs a small sole trader business that brings in a net of $17,500 a year. They also don't have a tax obligation.

Person C is retired and owns shares in a company that earns $17,500 of profit on C's shares. Being a company with other shareholders, it pays 30% company tax and most of the rest is distributed to shareholders as dividends. Person C receives a dividend of $12,250 (that is, 70% of $17,500). They have effectively paid $5,250 in tax on their income because of the veil that the company structure has created.
Under the current imputation system, Person C receives a franking credit for that amount and a payment of $5,250 comes from the ATO. This recognises the fact that the full $17,500 earned by the company should belong to Person C, just the same as Person B’s business income or Person A’s part-time salary.

It’s similar to someone getting a tax refund at the end of the year because their PAYG taxes didn’t take legitimate deductions into account. They overpaid tax and so are allowed to get it back. It is their money.

There was a lengthy discussion of this in the Campbell Inquiry in 1981 (see chapter 14). When he introduced dividend imputation in 1987, Paul Keating moved our tax system in the right direction. However, his system had a flaw in it because Person C in my example was not afforded the same fairness as higher tax rate payers. John Howard (the Treasurer to whom the Campbell Inquiry Report was delivered) and Peter Costello fixed it, so that Person C could get that $5,250 back. Thus, in two steps we ended up with a much better tax system.

Most of the arguments against zero tax rate individuals receiving franking credits are actually arguments against the whole dividend imputation system. For if you accept that zero tax payers shouldn’t get a credit, why stop there? Why should any tax payer get franking credits to offset other tax? The answer for all is that the pre-tax earnings of the companies they own, partly via being one shareholder among many, or wholly if it is their own business, belong to them.

The company, for all shareholders irrespective of their tax rate, is simply a pooling structure. It should not pay tax on earnings it pays to the members of the pool. The fact that it does is what creates the errors of perception about the incidence of taxation, about who should pay what, that are now clouding the discussion.

The current dividend imputation system is the second-best way of fixing the error that having a company tax system has created. The best way would be to have a zero company tax rate and apply withholding tax on retained earnings and foreign shareholder distributions.

From the Budget point of view, both systems would raise the same revenue.

That's brilliant... nailed it!!

Just to expand on it Warren and bring it to ~ what will be paid when this tax year ends. Two people earn the same amount,one works and is paid $45K.Tax deducted is slightly over $4K but call it $4K.

One has 45K gross in fully franked dividends,taxed from the first $ earned at 30%.So 3 x 4 .5 and move the decimal point, $13.5K is paid in tax. One has $41K net over the year,the other one has $31.5K ( 45 - 13.5 ).
All aboard for the fun and games. One gets $9500 back as a tax refund The other gets nothing.They both have a net income of $41K and paid the same amount of tax.

Then the framing comes in to change the picture. One complains long and loud,I paid tax and didn't get a rebate. He didn't pay any tax and got a $9,500 rebate. Abolish franking credits,when is the govt going to stop this,it's just not fair.

They earned the same amount of money,and paid the same amount of tax,but somehow it's still not fair.

Explain what is "fair"?

Sorry Kevin

Each would pay the same tax.
The worker earns 45k his employer sends 4k to the ATO and gives them the rest 41k.
The investor earns 45k the company sends 13.k to the ATO and gives them the rest 31.5k.

Time to lodge returns.
Each has a taxable income of 45k.
One has had 4k sent to the ATO the other has had 13.5k sent to the ATO.
Tax payable on 45k is around 4288
One will get 288 returned (4288 - 4000)
the other will get 9212 returned (13500 - 4288)
So, both have earnt 45k and paid 4288 in tax.

Thanks Warren. This system has been around for 38 years and yet here we are still spelling out the basics of how the system operates. If this is where we are at as a nation, we are clearly ill-prepared to have a mature conversation about the role of 'franking credits' in the broader economy. The next time the dividend imputation system, and more particularly, franking credits comes up as a topic of political discourse in our Federal Parliament, it would be reassuring if the populace would demand higher standards of those seeking change rather than just falling in line with the prevailing propaganda. We demand higher standards of our footy coaches than we do of our political leaders. Thank goodness we have people like you and Jon Kalkman (and others) that prevent propaganda from winning the day.

Vic C,
The issue is with retirees, pensioners, and others who pay little or no tax; this cohort caused Labour to lose the elections in 2019. Before the introduction of Franking Credits, an individual who was already paying tax was taxed again on receipt of a dividend. On the other hand, a person who does not pay tax and receives the dividend would unlikely be taxed unless the dividend caused the income to exceed the tax threshold level. The ATO would have received the 30% company tax on the dividend as well as an additional tax from the shareholder, depending on their tax rate. The low-income earner would only receive the dividend and is unlikely to pay any tax, so the ATO still receives the 30% tax from the company issuing the dividend.

The introduction of Franking Credits was to eliminate this double taxation for tax-paying individuals who purchased shares. Using the example above, the taxpayer on a personal tax rate above the company Tax of 30% would still pay tax on the difference between the company tax rate and the personal tax rate. If the personal tax rate is below 30% then the franking credit would reduce the overall tax burden. The ATO receives the 30% tax from the company as well as any tax payable by the individual. However, a pensioner or a low-income earner will get the tax paid by the company as a franking credit from the ATO. As a result, the ATO retains zero tax from this cohort.

How to avoid double taxation of company profit?:
. Company Tax to Shareholder Tax Credit Imputation.

If companies pay no dividends, they are still taxed on profits.
. Shareholder can not wrest the company tax from ATO.

Which has the greatest Return on Shareholder's Cash: Shareholder, Company or ATO?

The labor government introduced franking credits for good reason.
I can recall when company tax was much higher, personal tax was also much higher, and private companies were compelled to distribute most of their "passive" income.
The effect of that double taxation was investors in public companies and private companies retained almost none of the distributed income from their investments or endeavors.
Accountants and lawyers were engaged to overcome this problem instead on focusing on more economically valuable work. Let's not go there again.
Under the current franking credit system, high income earners pay additional tax on dividends if their tax rate exceeds 30%. Low income earners get an important refund, and income that is designed to be tax free such as pensions remains tax free.
Companies don't have to pay dividends, and shouldn't it they can grow earning at a greater rate than investors can invest their dividends. Investors are always pleased with capital growth,
Leave it alone and have governments live within their reasonable means rather than have double tax grab at franking credits.

"distributions to be deducted from company taxable profit and fully taxable in the hands of individual investors":

ATO wants withholding tax so that tax dodgers, and foreigners, can not run off without paying some tax.

Company tax rate fixed 25% / 30% because company withholding the tax has no idea what other income a shareholder has.

Same as with wage earners: withholding tax to likely amount, then tax credit for amount withheld.
Otherwise some will spend all, not provide for tax, then claim they are 'skint', bloodless stoney broke.

Think you're drawing a long bow here, James...

To quote Mike Henry from the AFR on 27/6/2023, after Palaszczuk raised coal royalties:

“In this case, both the outcome and the process have meant for BHP that we have opportunities to invest for better returns and lower risk elsewhere. And we will not be investing any further growth dollars in Queensland under the current conditions. There will come a day people will look back and rue changes that were made and how they were made because of the impact on that long-term investment."

Labor governments are not serious about improving productivity and business investment, full stop.

One only needs to look at their energy policy to prove this... which has assisted in the demise of Oceania Glass, Quenos, Sorbent (they shifted manufacturing from Dandenong to off-shore), and to Whyalla Steelworks and Tomago being on life-support.

How can it take over six years for state and federal governments to approve the extension of Woodside's North West Shelf project?

With Trion being developed in the Gulf of America and Woodside Louisiana LNG kicking off, good on Meg for looking to grow the business outside of Australia. I hope they 'de-camp' from Oz altogether. Let's see the socialists scream about the forgone taxes and royalties.

No more live sheep exports... what's next, beef?

As Charlie Munger said; "show me the incentive and I'll show you the outcome."

As for economists, Buffet sums them up best: "any company that hires an economist has one employee too many..."

I think that a lot of the poor productivity outcomes these days result from poor employer training of staff. On numerous occasions I have had to have professionals/tradies redo work because it was not done correctly in the first place (four times for a simple will where I gave very precise instructions). Likewise staff in cafes are more often than not poorly trained and organised (they could usually do with one person less if they knew their jobs properly) and don't start on the number of times I've seen staff playing on their phones rather than working.

Why is it that employers' lack of training never gets mentioned when talking about productivity?

I’ve rarely read so much nonsense James Gruber.Talk about a long bow.
.If companies want to invest more capital they’re not restricted to obtaining it from profits. They can raise it from issuing more shares.
I await your posts explaining that black is white and high is low.

Or borrow.

I meant to say “or borrow”. Also there are dividend reinvestment plans.
Reading Jame’s article again, not being time pressured as I was the other day, he puts up an hypotheses,, “that franking credits result in lower industry investment.” He then puts up a lot of data but nowhere does he prove his hypothesis, cause equals effect.
My hypotheses is that franking credits have zero effect on industry productivity. A bit of common sense is needed.
1. If you remove them, that is double tax the shareholder, according to his hypothesis, industry productivity should increase because less dividends will be paid out. As I said, this is a very long bow, to believe. .
2. Jame’s argument conflates dividends and franking credits. If the argument is that franking credits lead to increased dividend payout ratios and this leads to reduced industry investment, whatever the cause, I don’t believe that’s true also. Effectively he’s saying that if our share system .operates more like the US share system, low dividend payouts but high buybacks, this would increase business investment.
I don’t believe this is true because companies have more avenues, than retained profits, to supply capital for investment. Apart from dividend reinvestment plans, companies have the options of borrowing and issuing more shares.

Interestingly, to me,, James uses the Australian Health company CSL,to explain franking credit payouts. Only about 10% of CSL’s profit is made in Australia, so franking credits are very rare. 50% is in the US and most of the remander is in the Europe. A great Australian Company which invests heavily in clinical trials and developing new therapies. CSL is also heavily involved in share buybacks to return funds to shareholders. The company is investing in expanding its plasma collection capacity and manufacturing facilities in the US, particularly to meet growing demand in China.

Remove franking credits:
. company still pays tax,
. shareholder has less cash, spends and / or invests less,
. government has more cash, spends and / or invests more.

Which delivers better outcome: shareholder or government cash?

Much of the reason that Australian companies pay out so much of their profit as dividends is not just that super funds and individual investors want the franking credits, but shareholders also do not trust them to spend their profits wisely. Half of the ASX market cap or more is banks and mining companies, who left to their own devices historically spent those profits on empire building with overseas acquisitions which a few years down the track had to be written off either mostly or entirely. So shareholders want to see the money in their pockets first, and if the company wants to do something else with it then they can ask the shareholders for their money back via an institutional placement and/or shareholder placement plan.

Totally agree

Indeed

"There’s little doubt that companies acquiescing to shareholder demands for higher dividend payouts has led to lower business reinvestment than there otherwise would have been......"

Not "little doubt", there is a "lot" of doubt - totally unsubstantiated comment! Examples pl?

Reality is that big Aussie corporates have Billions of Franking credits on their books - if they get locked up forever, Canberra wins, Small shareholders get smashed

Rob,

If all the ASX 200 companies paid 0% dividends and reinvested their cashflow, it would result in hundreds of billions in business investment per year.

Instead of "little doubt", James should have said, "no doubt".

Jeremy, you are assuming that they have something useful to do with the money. Other than pushing up share prices to get a bonus

Jeremy, it's overly simplistic (or perhaps lazy) to assume that every single dollar of profit reinvested into the business would translate to an incremental return. If management cannot generate an additional return by reinvesting the profits, they have no business wasting the cash on their ambition as it is essentially destroying shareholders' value - they would be better off distributing the profits to shareholders.

Alex, you totally missed my point. James said that higher dividend payouts = lower business reinvestment. That's a fact.

If all ASX companies reduced dividend payouts by x amount, it would increase business reinvestment by x amount. And even if some of those investments were bad, collectively that would lift business investment.

That's also fact.

It has nothing to do with the rights or wrongs of dividend payouts - that's not the point.

James, I'm simply pointing out the fact that higher business reinvestment means nothing if it doesn't translate to an incremental return, which is a fact that you (and James) seem to fail to acknowledge or appreciate.

Alex,

Read my piece again: I do acknowledge that.

James,

Your piece notes that a higher dividend payout leads to a lower business reinvestment - that's fair enough, but it does NOT talk about the potential rate of the return on the reinvestment and whether it would be meaningful enough to justify it.

I think this argument runs the risk of conflating several themes and coming up with causation equals effect, which I'm not so sure is the case.
As the author suggests, there is a lot going on with productivity. For one thing the whole nature of our economy has changed in the time frames that are being referenced. We used to make things here, now we provide services (banks, insurance, retail, health, etc.) are by far a larger slice of the economic pie than they used to be, and it is much harder to improve productivity in this space, even with all the technological advancements in the last 20 years.
In addition, the listed company world is generously littered with numerous bad ideas (and destroyed companies) arising from additional "investment", ie. poor takeovers, new markets, overseas branches, etc. in which franking credits have had no role.
There is also an argument that the refund of franking credits has enabled a large cohort of our population to maintain their spending power, which ultimately helps overall GDP than otherwise would be the case, and their removal would have to be made up from somewhere else to maintain this spending.

Rob W,

Savings and business investment > consumption when it comes to driving productivity and economic growth.

Thinking otherwise is a common misconception.

James conveniently ignores dividend reinvestment plans. Paying out dividends puts the investment decisions back in shareholders hands. If a company is performing well, investors will simply reinvest their dividends. If they are performing poorly, the investor has the choice to shift money into better opportunities. I’d argue our high payout ratios have led to increased investment in many innovative tech companies as investors and SMSFs seek better growth opportunities (Wisetech, REA Group, Carsales etc). None of these startups would have got off the ground if shareholders were trapped in the old ASX stalwarts wasting blood and treasure on poorly thought out overseas acquisitions (think Bunnings, NAB, ANZ etc).

Higher company tax rates (with imputation credits) would be great for Australian shareholders

Consider, if the company tax rate went up to 99% (for an extreme example). Australian shareholders would get their dividends franked to 99%, so would get $1 in cash dividend, and $99 in franking credits. They would put $100 in their personal tax return, get it taxed (at say 20%) and get a $79 tax refund. So in total $80 in return for their shareholding - exactly the same in total as they get now with a 30% company tax rate

Overseas shareholders would however on get only $1 in dividends. So the overseas shareholders wouldn't like australian shares. They would sell, and the australian public would see these shares as a bargain (supply and demand). The result, Australian companies now owned by Australians. Wouldn't that be good?

If franking credits are eliminated, aren't shareholders even more likely to want dividends increased to compensate for the lost franking credits?

Thanks for the article, James. Franking credits are still widely misunderstood, the Treasurer is talking about tax reform, Labor got very confused about this topic in 2019, so your article is most timely.
The fundamental problem with franking credits is the obscure terminology. The reference to franking (which originally referred to postmarking a stamp) eludes most people and the word “credit” implies "freebie” to many people.
Avoiding double taxation of dividends, as it has been implemented, simply means that (for an Australian resident owning shares in a company whose profit are taxable in Australia), the part of a company’s profit which is distributed to shareholders is taxed as income in the shareholder’s hands not the company's hands.
This could have been achieved by the company simply paying the full untaxed amount to the shareholder. So, in your CBA example, CBA could simply send the $1,000 to Tim. He’ll include that as income in his tax return and pay tax accordingly.
That model avoids double taxation but does not use franking credits.
For mechanistic reasons, it is simpler for the company to pay $700 to Tim and send the remaining $300 (the franking credit) of his income off to the ATO. It is marked (“franked”) both as income and as tax withheld until his tax return is processed – at which time he’ll receive a credit if, overall, too much tax has been withheld for the total income he has earned.
Franking credits are therefore no sort of freebie, and they are also not necessary to avoid double taxation. Their relevance is simply mechanistic, and they should have no effect on the economy, unless people, or companies, act irrationally because they misunderstand the process.
I suggest the more relevant question is: does the absence of double taxation hurt the economy? I’d be very surprised if an argument can be made to support that.

If instead of thinking Franking credits are a bonus, we were to think of them like the PAYG that is deducted from our salaries as estimates of the tax owing, which is adjusted when we put in our tax returns, all of the controversies with franking credits would disappear. They are simply an estimate of the tax owing on the dividends by the shareholder, which are adjusted when the shareholder submits their tax return. If too much was deducted, then the shareholder gets the excess refunded (eg the shareholders tax rate was 15%), if not enough, then then the shareholder has to make up the difference (eg the shareholders tax rate was 47%)

Exactly, JohnS. I have never understood what is so difficult about the concept, which is to prevent double taxation. I think the words "franking credits" leads to confusion but I can't come up with an acceptable alternative. I'll have to think about it my early morning waking hours!

Why does the ATO do this?
Simple - so they get their hands on the cash immediately and hope you don't file a tax return for 9 or more months. Free money courtesy of the taxpayer.

Maybe if we changed the terminology of company tax and franking credits to withholding tax then the problem would disappear. Companies withhold some of their shareholders income (aka company prodits) and the shareholder gets the withholding tax treated like a payg payment)

The introduction of franking by the Hawke Keating government was one of their great achievements. It greatly promoted Australians buying Australian companies and the capital that brought to companies involved.
Honestly, we have had the debate on franking.. It was a significant reason Labor lost an election they should have won in 2019. The current Labor party before the election said they do not wish to go back to the policies of 2019 as the people have rejected them. Mr Albanese interview with the AFR on April 25 just before the election makes this clear.
So why Morningstar is now attempting to cause ongoing churn by readdressing franking is disappointing. Franking is a good thing and look no further to the capital markets of the UK where a tax hungry government there removed them.

"Higher dividend payout ratios mean companies retain less of their free cashflow for reinvestment into their businesses."

What tosh. If there is investment or expansion to be made then the company can raise funds. If the company is performing then the shareholders will soon stump up the cash needed. If the company is not performing then it is a good thing that the funds are paid out to shareholders.

Good way to dilute shareholders that.

Exactly, why should a company decide NOT to pay out all their profits to the shareholders. In other words, companies are deciding what to do with their profits not the shareholder. If the company is a "good" investment (better than other companies) then they will have no difficulty seeking and getting their existing and new shareholders to purchase some newly issued shares.

By issuing new shares, the shareholders (existing and new) can decide for themselves whether this company is a good investment, rather than the company forcing its will (retaining profits) on shareholders.

Surely choice is best, and shareholders should have that choice, not the company

Companies that retain some of their profits are forcing their will. Blimey, where to start?

When i studied Economics I heard the story that President Franklin Roosevelt asked his wartime prices guru in J K Galbraith "tell me professor do you have any one arm economists?', he replied "not that I know, why Mr Presidemt" to which Roosevelt replied "all I get from you is on the one hand this and on the other hand the opposite". This very interesting article leaves me in the same place - profit invested in new productive assets for additional dividents later but we love the cash flow here and now - perhaps the Editor could find a one arm Economist.

"Genoveve holds shares in CSL. The company paid her a dividend of $750 and her statement showed a franking credit of $750, amounting to total income of $1,500". Shouldn't the franking credit be $321.

If dividends were paid out of pre-tax profits, the company would pay tax on retained profits and the recipient would declare the income and pay tax as per their taxable income rate.

The whole franking credit system is overly complex and is typical of many tax rules. Far simpler would be to allow distributions to be deducted from company taxable profit and fully taxable in the hands of individual investors.

The franking system is easy,ridiculously easy.People refuse to see it.As I pointed out years ago. If I went to work and earned $100K tax would be deducted from my wages weekly or whatever period I was paid

I earned $100K in dividends the tax office got 30K of that.. Do the tax forms at the end of the year,the tax payable then was ~ 25% . The worker paid tax weekly and didn't get a rebate. I paid 30K in tax ( deducted and called franking credits ) and got $5K tax rebate.

When I do the tax form this year the worker earned $250K ,he had a good( ?) job in resources working 12 hrs a day. I sat on my arts and picked up $250 K in franked dividends . We both pay the same amount of tax if we have no deductions. It isn't complicated

10 years in the future if nothing changes same thing gross wages and tax deducted is net wages. Gross dividends and net dividends, tax deducted and called franking credits. How can people think that gross wages minus tax leaves net wages is complicated. Exactly as James explained . CBA easily funds our retirement, if they paid out once a year the dividend statement would read $70K to your nominated bank account,$30K went to the tax office

Tony how much tax who foreign investors pay to the Australian Tax Office if the dividend was fully taxable in their hands. None.
The present system ensures that foreign investors always pay tax on their share of company profits at the company tax rate because the tax was extracted before they receive their dividends.