Buyback law closes loophole ‘but franking credits here to stay’
Assistant Treasurer guarantees dividend imputation scheme but says off-market share buybacks exploit a loophole that must be closed.
Assistant Treasurer Stephen Jones has given a cast-iron pledge that the franking credit system is here to stay but says changes to off-market share buybacks are essential to close a loophole that unfairly disadvantages ordinary taxpayers.
He said off-market share buybacks were being used by large corporations – such as BHP and Westpac - to preference institutional investors and the amounts involved ran into billions.
Speaking from Canberra to the IPA National Congress in Surfers Paradise, Mr Jones said the government was releasing draft legislation on the changes today following their announcement in the budget last month.
“It’s about ensuring that the system we have operates with integrity and fairness. They close a loophole which offers incentives to large corporations to buy back their shares using their franking accounts,” he said.
“I want to be very, very, very clear about one thing: franking credits, they’re here to stay, end of story, full stop.
“This policy is not about changing franking credits - ordinary mum and dad investors are going to continue to receive their dividends and their franking credits associated with that.
“Of course, they’re still going to be able to participate in share buybacks schemes. Our changes are only to align the corporate tax treatment of on and off market share buybacks.”
“The measure is going to strengthen the integrity of our system to ensure that there is one simple, clear way of taxing share buybacks.”
The incentive for corporates to buy back their shares off market, instead of on market, was an unintended consequence of the franked dividend system he said.
“It's not what dividend imputation was designed for and it's not fair. It's not fair shareholders. It's not fair to taxpayers.
“Dividend imputation is there to give companies a way of allocating tax credits to their shareholders when they distribute dividends. That purpose will remain.
“It's not there for corporations to alter the tax treatment at taxpayer expense of off market share buybacks.”
He said such deals were rare, but came at a huge price and cited a couple of recent examples to reveal the extent of the problem.
“Such deals give preferential tax treatment to large institutional investors that aren't usually available to small mum and dad retail investors. They’re not only unfair to small shareholders, but they often run into the billions and billions of dollars.
“In 2018, BHP did an off market share trade with some of its large institutional investors to buy back $8.5 billion worth of shares. The market price at the time on the ASX was $32.14. But BHP only paid $27.64 in an off market share deal the supplement was made up of franking credits.”
“This year, Westpac employed the same mechanism to get a discount on its $3.7 billion of off market share buybacks. And last year, the Commonwealth Bank got a discount on its $7 billion of market share buybacks.”
While the companies had been acting lawfully, they were taking advantage of a loophole in the system that needed to be closed.
“We estimate the measure that we announced in the budget, will save the budget on average $200 million a year,” he said.
“Budget preparation is challenging. There are no easy choices. But as we're looking at the choices, we have to have fairness and system integrity at the front of our mind.”
Philip King
17 November 2022
accountantsdaily.com.au
Hot Issues
- 2024 Year End Tax Planning Guide (Part 1)
- Medicare levy surcharge OR basic health insurance ?
- ATO warns of ‘serious penalties’ for unlawful tax scheme promoters
- ACCC scam report
- Employees taking more sick days - and it's getting worse
- Foreign residents selling property in Australia
- How much does negative gearing really cost – an overview and an opinion?
- The Shortest-reigning Monarchs in History
- FBT Reminder – Odometer Reading
- ATO’s debts on hold campaign prompts new IGTO guidance
- A comprehensive collection of small business benchmarks
- The 2025 Financial Year tax & super changes you need to know!
- Underperforming employees: When can you terminate?
- A comprehensive list of guides to industry specific tax deductions.
- ‘Renewed concerns’ about economy sees consumer sentiment dip: Westpac
- Oldest Buildings in the World.
- Small businesses may ‘collapse under strain of payday super’, IPA warns
- ATO’s hands tied with scrapping on-hold debts, expert says
- What Drives Your Business Growth and Profits?
- Australian Taxation Office (ATO) shifting to firmer debt collection activity
- Why employee v contractor comes down to fine print
- Sharing economy reporting regime for platform operators
- Countries producing the most solar power by gigawatt hours
- Illegal access nets $637 million
- Accessing superannuation benefits.
- Does your business have a company Power of Attorney?
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- GrantConnect
- 2 in 3 SMEs benefit from instant asset write-off, survey reveals
- Updated guidance on R&D claims
- Do you know how to recover debts?
- Vimeo test
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
- January - March 2015
- October - December 2014
October - December 2022 archive
- A 2022 Advent Calendar for our clients
- Difference Between Leasing vs Hire Purchase
- How Have Australians Reacted to Interest Rate Hikes?
- FBT – Christmas Parties and Taxi Fare/Rideshare
- Employee Christmas Parties and Gifts – Any FBT?
- Big-end-of-town tax: miners, banks pay up, but for one-third it’s zip
- Cash flow forecasting template
- Buyback law closes loophole ‘but franking credits here to stay’
- Budget October 2022-23-Comprehensive summary
- Federal budget 2022 -- Winners and Loser
- Federal Budget 2022/23 - Documents and Facts Sheets
- Budget: all the key points you need to know
- Sole traders cut back super, work longer hours
- Small business debt and tax gap at top of ATO hit list
- Christmas ‘crunch time for economy, inflation outlook’
- What business needs to know about the skills and technology boosts
- SMSF scam investigation sees call centre raided
- How to avoid personal liability when dealing with DPNs
- The Countries that Consume the Most Beer in the World
- ATO’s interest charges hit highest level in seven years
- Australian Taxation Office warns against asset wash sales
- Take action on valuations now to avoid delays, says ATO
- Australian Taxation Office-(ATO) reminder to small businesses this tax time
What our clients say about us