Originally posted by JonnoH
To someone who understands perfectly well that companies aren’t going to burn the >92% unaffected taxpayers to appease the whinging <8%, it’s just a stupid question.
To someone who thinks companies only reason for taking these measures would be to appease the "whinging 8%" , this is a stupid question.
But the 92/8 split you talk about, is not that relevant, except in the sense that the 8% all of a sudden have a huge incentive to start chasing securities that don't involve franking credits. Money[which includes the value inherent in franking credits] is fungible, and it will chase the best returns. The first signs of this have been the spike in buybacks involving franking credits. BHP's recent buyback was , in part, a way of monetising their franking credit account before a possible Labor win, they actually spelt that out.
Not for the benefit of the 8%, but for their benefit.
And companies will, because debt instruments will be a little cheaper, because of this measure , change their mix to a lesser or greater extent, and chase the 8%'s money, for their own benefit.
But, I'll give up waiting for an answer.
I'll outline a fictitious capital raising for an IPO, the figures are obviously made up, and simplified, just to illustrate the point.
ACME Engineering decides to float.
It needs 10mill @ $1 per share.
Its predicted profit is 500k
So it makes that, and its company tax payable is 150k.
It therefore has the capacity to issue a dividend of 3.5c with 1.5c franking credits for each of the 10million shares
Now, this isn't that attractive to your 8%.
Now if ACME were to structure their IPO as,
5 mill shares @ $1
5 mill converting preference shares @1 , paying 4.8% [this snapped up by the 8% , as the real yield is a lot more attractive than 3.5% that the shares would give them, without getting the franking credits back]
They have their 10 million.
The company makes 500k on its operations , minus the 4.8% payments to the prefs $240k, 260k after tax profit.
tax payable 78k
It has the capacity to issue a dividend [on the 5mill of ordinary shares ] of 3.64c ff .
So simply by changing their mix of financing, which they could do because of there was a large pool of money happy to have an interest payment , rather than a franked dividend, which is taxed at their marginal rate[ 0% in a pension phase smsf ] the companies shareholders get a larger dividend.
The smsf holder takes a lower return, but still a lot better off than the franked dividend return.
Note the effect on the company tax.
Now the government are no worse off[in fact they are 3k better off] than if they left the franking credit system as it was, but this a much smaller contribution to the 5 billion per year than was envisaged.
Government revenue has gone up because of less refund to the 8%, but down in the company tax collections.
Now imagine that, and similar scenarios repeated ad nauseam . It could be a lot.
That doesn't mean the whole 50B goes by this scenario, but is one of a number of things which will cause leakage.
Ants eating a cockroach.
Now, on a different note, the BHP type buybacks are an abomination, and a misuse of the franking system, and along with the use of franking credits in pseudo-dividends in hybrids , should be banned.
If companies want to buy back shares use their own money, and if they have debt securities, pay interest from their own money.
I wouldn't be surprised if this measure didn't save the government more than the present proposal, and I dont think it would be that controversial .
