Franking Credit Frenzy

In the AFR today there was much speculation about tax changes and shareholders not wanting to lose the benefit of franking credits, or at least not let them go before Jim Chalmers does something stupid.

Liberty Financial Group was mentioned as being a strong candidate that might reward investors because of its build up in its franking credits balance. I hope Sherman Ma is considering.

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Franking frenzy: The push is on for dividend treats

Tax system changes are in the zeitgeist and lingering over company’s decisions. There could be money for investors.
Jul 21, 2025 – 5.15pm


Matt Comyn’s Commonwealth Bank of Australia is talking about it, miners are worried about it, and now fund managers are urging boards to think about it. We’re talking tax system changes. They’re in the zeitgeist, on the wind and now lingering over the upcoming reporting season.
Got franking credits? Investors want to see them.
Got franking credits and surplus cash? Investors really want to see them.


Franking credits are no good in a company’s back pocket.  David Rowe
Because while no one can be sure what the treasurer’s productivity roundtable will bring or whether CBA is even barking up the right tree in suggesting some pretty fundamental tax system changes, what’s unlikely to be on the cards is a cushier ride for profitable companies and/or their shareholders.
So, why risk losing any value that could come from franking credits? Imagine if those assets and investors’ ability to utilise them disappeared with the stroke of a pen.


So, fund managers are telling us to watch out for more franked dividends and special dividends this reporting season – it could be this year’s sweet earnings season surprise.
Perhaps investors are jumping the gun, but if fund managers are saying that to us, you can be sure they’ve made the same plea to those management teams and boards sitting on hefty franking credit piles and considering capital management policies for the financial year just gone. And, the way these things work, some boards will see the rationale and take the bait.

Is it a good thing? Distributing franking credits is; they are worthless in a company’s back pocket and there is no benefit in keeping them for a rainy day. Whether surplus capital is better in the hands of shareholders or the company is where the debate gets into fraught territory.
Investors love franked dividends in just about all conditions, while bankers, consultants and corporate advisers often argue cash is better spent on growth options (organic or M&A). Both are involved in the capital management debate, although it’s the latter usually debating it inside the boardroom while investors have to do it from the outside.
You can argue this one either way; the same people will argue both sides in different circumstances. We’re usually more inclined to side with investors – it is their money, after all. And there’s a graveyard of Australian companies who’ve leveraged up the balance sheet with big and poor M&A choices and lived to regret it.
Since the rules were changed a few years ago, companies have only two options for returning surplus franking credits to investors – dividends and special dividends. Both require access to cash and healthy balance sheet. Off-market buybacks, where a company could use franking credits to buy back discounted shares, are no longer an option.

Corporate Australia’s biggest franking balances often sit with former titans of industry – those that paid a lot of tax on profits in the past, yet do not have the ongoing cash flow and/or funding firepower to pay dividends required to release them today. That’s one of the tragedies of the franking system; these companies have paid the tax yet cannot afford to pass the benefit on to shareholders.
Seven West Media, for example, had $114.4 million franking credits available to be released to shareholders according to its most recent annual report or more than half its market capitalisation, to top Macquarie’s list of franking credits as a proportion of market value. Iluka Resources, Resimac, Rio Tinto and St Barbara rounded out the top five.
Boards typically consider meaningful capital management once or twice a year and announce it alongside annual and/or half-year results.

Macquarie reckons Downer Group, Flight Centre, G8 Education, JB Hi-Fi, Jumbo Interactive and Liberty Financial Group may have the capital to act on their franking credit balances, according to its analysis performed in May based on 2024 numbers.

The hard part for boards is knowing whether genuine tax reform really is on the agenda and whether it could extend to dividend imputation, which has been a political hot potato in the past.
But we’d ask whether it would really hurt to listen to investors. If there are franking credits there, and there is an ability to release them via dividends and/or a special dividend, then why not?

A company can always pay the dividend and ask for the money back in an equity raising if the next expansion opportunity is that compelling. Australian capital markets and fund managers in particular find it hard to turn down cheap stock – especially from a company that is an astute manager of shareholders’ capital.
Hopefully, it doesn’t take the threat of tax changes to make boards realise that.