Could franking credits and dividends be used to fund stimulus?

The PM says ‘no’, but could franking credits and dividends still be seen as options?

australian ten dollar note surgical mask

Speculation that franking credits could be used to help fund the government’s COVID-19 stimulus package have been effectively quashed by Prime Minister Scott Morrison – for now.

Fund manager and franking credits advocate Geoff Wilson says the government will leave nothing off the table to fund the stimulus packages. This may include revisiting Labor’s unpopular franking credit proposal that seemed to sink the party at the last election.

Mr Wilson, who led a campaign against Labor’s franking credit policy at the last federal election, believes franking credits could potentially be used to help fund the stimulus measures that total $213.6 billion from the Commonwealth, $11.8 billion from the states and $105 billion from the RBA.

“The fascinating thing is it looks like the federal government is going to spend the equivalent of 10.6 per cent of GDP over a six-month period, and that is unprecedented spending,” he noted.

“Someone has to pay for that, either higher taxes later on … it has to be paid for at some point in the future. Where should that money come from?

“I would assume from a government perspective that everything would be on the table.

“Whether they look at [franking credits], I assume everything would be on the table in terms of how this is going to be funded.

“All we hope is, if anything is done, it is done equitably, fairly and logically.

The Parliamentary Budget Office recently revealed that franking credits cost the government $5.8 billion each year. KPMG also warned that the government might revisit the policy to ease the strain on the country’s tax base.

Australia’s major banks may be under pressure to suspend dividend payments during the pandemic.

Several central banks have already moved to stop them, including the Reserve Bank of New Zealand, which told local banks on Thursday to stop paying dividends to shareholders and parent banks in Australia.

The central banks hope to “further support the stability of the financial system during this period of economic uncertainty” and say the order would remain in place until the economy has “sufficiently recovered”.

The UK’s biggest banks have also agreed to scrap billions in dividend payments as “a sensible precautionary step given the unique role that banks need to play in supporting the wider economy through a period of economic disruption”.

Increased job losses and economic damage mean Australian banks are now under pressure to follow suit. The RBA and the federal government have announced a raft of measures aimed at supporting individuals and businesses throughout the crisis.

These include cheap credit for banks that will be converted to low-interest loans to help float businesses, and six-month deferred repayments for homeowners and businesses.

Banks may have to suspend dividend payouts to assist these measures.

“APRA is actively engaging with banks to understand their intended approach to dividends, as well as other distributions to shareholders or employees, given current uncertainties,” an Australian Prudential Regulation Authority (APRA) spokesperson told The New Daily.

“For the time being, decisions on dividends and variable remuneration remain matters for boards to determine in line with their obligations under APRA’s prudential framework.

“[APRA had] advised banks that it expects them to prudently manage their capital and ensure their actions in the foreseeable future are consistent with their ability to provide ongoing credit support to the broader economy.”

Prime Minister Scott Morrison has stated that the nation’s financial regulators had, so far, no plans to scrap dividends.

“The Council of Financial Regulators is considering this matter,” he said.

“But we have not received that advice to move to that level.”

Economist Saul Eslake said that scrapping dividends would protect banks’ capital and boost their capacity to lend and might be regarded by the community as a “sacrifice being made by shareholders and banks at a time when lots of other people are making sacrifices”.

“But the counter argument, of course, is that an awful lot of mums and dads, self-funded retirees, and so forth, do rely on bank dividends as an important source of their income,” he said, adding that super funds could also suffer as they, too, own plenty of bank shares.

But the real victims would be those of modest means who rely on dividends for income. Retirees who rely on dividends even more in the current low-interest rate environment would fall into that category.

Do you rely on dividends to fund your retirement? Are you prepared to sacrifice franking credits to help fund the government’s three stimulus packages?

If you enjoy our content, don’t keep it to yourself. Share our free eNews with your friends and encourage them to sign up.

RELATED ARTICLES





    COMMENTS

    To make a comment, please register or login
    Captain
    6th Apr 2020
    10:11am
    We are SFR's and depend on dividends to fund our retirement, so the suspension of dividend payments will certainly hurt us financially.

    I suppose franking credits will go by the board (for a short time the government will say), however once they are no longer paid (temporarily) they will be suspended forever.

    Self Funded Retirees will be hardest hit of course and everybody will have to tighten their belts. It is noted that our PM has said that politicans will not be taking a pay cut even though their working year has been halved. Where do I sign up!!
    leek
    6th Apr 2020
    12:23pm
    The politicians might not be sitting in parliament, but they are busting their guts working in their electorates. helping their people. So don't think for a moment that they are not working. My daughters local Mp helped her with her problems with Centrelink, 2 hours later her claim was processed. So make no mistake- they are working!
    Rae
    6th Apr 2020
    3:27pm
    As long as the franking credits go for everyone including super funds and the wealthy but if it is just the mums and dads trying to save for themselves then that is not fair.
    I fail to see why companies are paying provisional tax for shareholders in the first place.

    If you have problems accessing the aged pension then ring you local MP for help.
    Chris B T
    6th Apr 2020
    10:21am
    Rob Peter to Pay Paul, how about having Minimum Taxing so there is none of this Zero/Next to no Taxing.
    How many Large Corporations pay anywhere near the top Rate Tax.
    Tax minimisation is Sport where they seek the Services of the Best at it and Pay Them For It, to be included as a Tax Reduction.
    The other you Earn it here you Pay Tax Here in Australia regardless where there Parent Company Resides.
    BigAl
    6th Apr 2020
    10:28am
    As usual the middle class workers and self funded retirees will pay for the stimulus. The rich have already moved their money elsewhere. Dividends will be cut substantially. Retiree savers are already affected by the lower interest rates. My estimates are that both government and personal debt will reach $2-3 trillion if the shutdown continues through to October. Many businesses will not recover and a lot of unemployed workers will take years to find a new job.
    Sceptic
    6th Apr 2020
    12:29pm
    Why treat this piece of speculation as fact, when it is denied by the PM in the first paragraph, but used by YLC to stir anti-government noises from the usual suspects.
    Viking
    6th Apr 2020
    9:35pm
    Sceptic, that's exactly why, it was denied by the PM.
    Jacka
    6th Apr 2020
    10:33am
    Well said Captain my Captain. For so many retirees and self funded retirees it would be an absolute disaster for the banks not to pay dividends. We have already lost way too much due to Bank Shares sell offs. We who have stayed true to the banks in these difficult times, supporting them financially, not leaving the sinking ship like rats, deserver and need a dividend and it's morally wrong that a dividend not be paid. Jacka.
    Jim
    6th Apr 2020
    10:45am
    Why is this topic being raised again, franking credits are tax that has been withheld to pay to the tax office, just as PAYE is tax withheld to pay to the tax office, in either case when you do your tax at the end of the year if you are entitled to a refund your over paid tax is returned to you, if you haven’t been over taxed then you don’t get a refund, if my statement is incorrect I would like someone to explain the difference.
    Jim
    6th Apr 2020
    11:02am
    Just to add a comment, many SFR are already helping the country’s economy by not claiming or not being entitled to a pension, if their income is further reduced then maybe they will have to claim the pension!
    Captain
    6th Apr 2020
    11:51am
    Jim,
    As you have said, this subject has been raised again and again. SFR's are among the lifters (to borrow a LNP politicanspeak line).

    The dividend imputation policy was a short sighted policy by the Labor Party that would have forced the average SRF onto a part pension far quicker than anticipated. If the LNP go down the same path SFR's are again in the gun.

    Give everyone over the age of 65 a full pension and tax any income above the pension at the applicable rate. Also change the tax laws so that Companies are compelled to pay tax. Watch the decifit begin to disappear.
    Jim
    6th Apr 2020
    12:18pm
    Couldn’t agree more.
    Rae
    6th Apr 2020
    3:31pm
    Yes Captain by continuing to hit up savers and support debtors we are creating a lot of moral hazard in my opinion.
    Viking
    6th Apr 2020
    10:45am
    No doubt about it if you try to provide for your own financial resilience, something everyone should be encouraged to do to prevent the sort of budgetary disaster the government has created, you are on your own. For the last twelve years interest rates have crept steadily lower and SFRs have been ignored on every perk,hand-out and compensation. Dividends are likely to be considerably lower for the next two years so the removal of franking credits would be the last straw.
    Rae
    6th Apr 2020
    3:34pm
    Seems odd to force compulsory super saving and then punish savers so fiercely.
    cupoftea
    6th Apr 2020
    11:30am
    So if the SFRs cant be touched and franking credits as well don't bother going near the industry super which this is one thing this government has always wanted and they will go for ours before they touch the LNP supporters
    Sceptic
    6th Apr 2020
    12:30pm
    What a load of tosh cupoftea.
    Dongers
    6th Apr 2020
    11:59am
    PM said NO!!! Stop rumour mongering in these sensitives and dangerous times
    Captain
    6th Apr 2020
    12:22pm
    Our PM is a politican. When he opens his mouth it is generally a word that can be changed to mean something else or "I was taken out of context".

    You do not need to be an apologist for this PM or any other politican.
    Priscilla
    6th Apr 2020
    12:14pm
    Why should retirees be held to ransome? We didn't cause this catastrophe and we shouldn't be made to fund the shortfall. Our superannuation, which we rely on to exist, has been decimated by the financial crash and we are not in a position to replenish the shortfall. Stop ripping off retirees!!!!!
    Lookfar
    6th Apr 2020
    9:51pm
    Priscilla, if there is nothing done about this catastrophe, it looks like it will kill 750,000 Australians, and that the majority will be retirees or other aged.
    Nobody in Australia caused this catastrophe, but it is in all our interests to contain it.

    The effect of the stimulus is to boost economic activity, if economic activity is insufficient then the economy could fail, - no stock markets, no banks, money becomes worthless.

    Many who hate the stimulus because of previous ideas do not realise that a lot of the stimulus money will sooner or later come back to the Govt in tax receipts, - in fact if the stimulus money is prevented from going overseas, the govt will eventually make a profit because the stimulus is a catalyst for the normal economic activity to continue, - so it behooves each one of us to think about the consequences of particular actions. - We are all in this together.
    Mark
    6th Apr 2020
    12:22pm
    Interesting that on one hand the Government will fund businesses to pay employees but then might consider taking away the income of self funded retirees.
    Sceptic
    6th Apr 2020
    12:33pm
    In the first paragraph, it states that the PM has quashed it. YLC, in its usual attempt to stir the easily agitated on this forum, adds - for now. You, Mark, among others, fall for it. don't you have a mind of your own?
    Mark
    6th Apr 2020
    1:03pm
    In reply to Sceptic. Yes I do have a mind of my own. So much so, that I actually mentioned to my Father a couple of days ago (before reading this article) that I thought that franking credits might be on the Government’s agenda in the future.
    The financial impost that the current spending will have on the economy means that everything will be on the agenda. In my opinion of course.
    Circum
    6th Apr 2020
    1:37pm
    Sceptic,that is the way politicians operate.Their reply to questions is usually open to give them an out ie an option to do the opposite of what they are currently saving.So you often hear "not in our current plans" "not now,I cant be any clearer than that" etc.Having a mind of your own should mean being able to analyse what is being said and reading between the lines based on past credibility.
    Circum
    6th Apr 2020
    1:37pm
    Sceptic,that is the way politicians operate.Their reply to questions is usually open to give them an out ie an option to do the opposite of what they are currently saving.So you often hear "not in our current plans" "not now,I cant be any clearer than that" etc.Having a mind of your own should mean being able to analyse what is being said and reading between the lines based on past credibility.

    6th Apr 2020
    2:13pm
    Franking credits wont be scrapped for the simple reason it affects too many pensioners on welfare. It will then decrease the average return and therefore reduce the deeming rate to the cash rate.

    6th Apr 2020
    2:32pm
    I was absolutely disgusted with the article in the Retirement Affordability Index Retirement Traps call The Biggest Trap of all - our entire retirement income system by Matt Grudnoff. It was complete hogwash and he sure has a grudge against SMSFs. Mr Grudnoff when are you going to realise that SMSFs are going rapidly because there is no other decent alternative where one can invest their super.
    floss
    6th Apr 2020
    2:42pm
    SFR's have suffered a huge hit to their Super pension and if the franking credits go they may as well claim a pension as many will.Can one of you please explain why there has been no mention of the Future fund that currently hold some 210 billion dollars hidden in a tax haven.Could our P.M. come clean on this one.I was under the impression this fund was put away for a so called rainy day.
    cupoftea
    6th Apr 2020
    3:34pm
    Floss the Future fund that is in the Cayman Island is for Politicians and Public servants so I am led to believe
    Sundays
    6th Apr 2020
    6:33pm
    Yes Floss, amongst other things to pay the unfunded liabilities of the Superannuation for retired Military, and commonwealth Public Servants. They paid after tax dollars into their Super schemes, but the Government just put their contributions into consolidated revenue until they realised that more and more would want their super and pensions on retirement. Hence, the Future Fund was set up. The fund seem to be doing well, so I would not be surprised to see some of it raided
    Ahjay
    6th Apr 2020
    2:45pm
    Sell Parliament House.
    Make the pollies work from home, It would save billions in air fares. even more on their meals and accommodation. Put them on the same super deal as ordinary workers.
    Abolish negative gearing. Ensure all companies, Both Australian and overseas, pay their fair share of tax.

    The trend is always to attack the poorest and most vulnerable in the nation whilst the rich get richer.

    Time to change.
    Eddy
    6th Apr 2020
    2:53pm
    When the smoke clears from the Covbid-19, and whichever government is in power, the issue of repaying the bill for the Stimulus will be close to front and centre. I suspect a whole raft of government spending and revenue issues will be canvassed. Franking credits may be one and the legislated tax cuts for high income earners could be another. An alternative would be for government to only pay the interest bill and defer paying the principle until the world economy recovers. In any case it is much too early to speculate. Do not get too excited.
    Eddy
    6th Apr 2020
    3:02pm
    ps: I earnestly hope that, post Covid-19, the Labor Party politicians desist the urge to call the Stimulus spending as Liberal Party debt (not that the Libs do not deserve it after calling the GFC stimulus "Labor Party debt").
    Rae
    6th Apr 2020
    3:22pm
    The solution then will be to sell down the shares as needed for living until you reach the amount for a full aged pension and concessions. Not ideal but then the debtors have pretty much destroyed any benefit of saving anyway.
    It seems being a Dependent of the State is the position they want everyone to fill.
    maelcolium
    6th Apr 2020
    3:35pm
    No and no, this narrative is completely invalid.

    Nobody has to pay for the stimulus. Australia is a sovereign monetary economy where the government issues the currency. Taxes are a drain on the currency to manage inflation, not revenue in the way that companies or households derive income. The deficits are a point in time calculation that disappear as soon as they are calculated and the clock is again set to zero. They are the national accounts, not a profit and loss statement. The currency is not backed by gold it's backed by the resource capacity of the country and Australia is resource rich, natural and human. The government is not revenue constrained, can never be bankrupt in it's own currency and has no need to recover the stimulus from anyone, so breathe easy.

    Where do you think the stimulus money came from? Answer, it was issued by Treasury. Why did Australia issue bonds and then the RBA buy them back? Because the Government has complete control over the currency - it doesn't need bond holders, that is just a convention. Put the numbers together on a balance shet and tou will discover the ins and outs all sum to zero. As long as Australia is resource rich the Government can do what it wants with issuing the currency.

    So when the next hare brained politician tells you this will takes decades to pay back, tell them to read Economics 101.
    Eddy
    6th Apr 2020
    4:31pm
    Maelcolium, do you mean the Government Debt is not real. That Mr Costello sold off all our public assets to 'retire' a Government Debt that did not exist. Was Mr Frydenberg, when referring to Labor Debt, actually telling a porky-pie. Why did not various political leaders tell us that we owed no debt to the world. Have we been defrauded by governments of all political persuasions? Where did all the money go? Why are you not the Secretary of the Treasury, or at least the Department of Finance, these senior bureaucrats seem to believe in Government Debt.
    Lookfar
    6th Apr 2020
    10:10pm
    Maelcolium, you are absolutely correct, there is some economic theory that a nation is like a family, but no family can print money, so that argument is destroyed, although of course some people will never realise that, but will continually scrabble around to find some mythical Bailiff that will knock on Parliament house door and demand all helicopter money be given to him.

    So, unless that mythical bailiff can be produced and be able to prove he has a greater hold on our wealth and happiness than we Australians, we can discount those hare brained politicians.

    Let's hope we cand find some better ones when it is all over.
    floss
    6th Apr 2020
    3:54pm
    Why can't we use the Future fund to bail out Australia it is our money or has it been put out of bounds.
    Greg
    6th Apr 2020
    5:04pm
    A quote from Treasury:

    "However, in 2017 the Government announced it would not make withdrawals from the Fund in 2020 and indicated its inclination to allow the Fund to grow until at least 2026-27. Drawing down later on the Fund is projected to strengthen the Government’s financial position over the long term."

    Also:

    "The Future Fund was established on 3 April 2006 by the Future Fund Act 2006. The Future Fund is a financial asset fund, set up to strengthen the Commonwealth's long-term financial position by making provision for unfunded superannuation liabilities that will become payable during a period when an ageing population is likely to place significant pressure on the Commonwealth's finances."

    The purpose of the fund was not to "bail out Australia", do it now and what happens in the years ahead when it's needed for the purpose it was created for.
    Tarzan
    6th Apr 2020
    4:24pm
    P M said not happening, no story here
    Mondo
    6th Apr 2020
    4:54pm
    My hope is that those who benefitted from the largesse will be the people and businesses who pay it back but my expectation is that as SFRs have little political sway, the LNP is there for business not for the electorate and to Morrison the truth is a dispensable variable, SFR's will be expected to cough up.
    One way to build some broad financial resilience to help cushion the country from future recessions would be to introduce a tax free up to $20,000 special savings account with special interest rates that could only be withdrawn at six months notice or in a proven personal or national emergency and would be the first call before anyone could claim government benefits. Any remain funds on retirement could be added to superannuation.
    Migrant
    7th Apr 2020
    2:20am
    More likely an increase in GST
    Rae
    7th Apr 2020
    7:41am
    That would be the fairest way and those who consume the most will pay their share.
    Mariner
    7th Apr 2020
    9:55am
    Can see that Rae, after all NZ has 15% and no exemption for fresh food. A lot of people here prefer the pension system in NZ so maybe they also would agree with the 15% GST.
    floss
    7th Apr 2020
    12:15pm
    My super is not backed by the Future Fund why should a politicians be, it is our money they have invested in a tax haven why not have the fund in AUSTRALIA.
    Jtee
    7th Apr 2020
    3:02pm
    Jim's paragraph "Give everyone over the age of 65 a full pension and tax any income above the pension at the applicable rate. Also change the tax laws so that Companies are compelled to pay tax. Watch the decifit begin to disappear."

    This is common sense and would be fair to all Australians. Stop the tax dodges currently used by the wealthy, large corporations and those who can afford a clever accountant. Overseas owned companies should pay tax at the source of production and not be allowed to transfer the wealth back to their base country.
    Anonymous
    7th Apr 2020
    3:50pm
    It was great to see them send the cruise ships back to their home ports. If they had only made Australia their home port and paid their taxes here they could have stayed.
    Priscilla
    9th Apr 2020
    5:22pm
    Retirees did not cause this catastrophe and should not be made to make further sacrifices. The financial crises has seen thousands of dollars stripped from our superannuation and as we are retired we are unable to make up this shortfall. We rely on our superannuation/investments to exist.
    Old B.
    10th Apr 2020
    3:29pm
    If they take my franking credits they reduce my allocated pension by 30% therefore I will be entitled to more aged pension as a top up.They are taking with one hand and giving with the other. Counter productive as I see it. Under the current law if you are receiving an allocated pension from a super fund you are don't pay tax. Franking credits are tax paid on your behalf on dividends paid into your fund. If you are exempt from paying tax then the franking credits are yours not the governments, they are part of the dividend. Seems straight forward to me, correct me if I am wrong.
    cinders
    10th Apr 2020
    4:40pm
    I don't mind scrapping franking system provided I'm paid my full share of bottom-line profits to bring to account in tax return just as exisiting unfranked divs are. Past uproar re scrapping franked div system & the 30% franking credit being retained by Govt demonstrates just how many are below 32.5% income tax rate which starts at $37,001, but they happen to have a few shares acquired when they could afford to save for when working--- $37,000 p.a. and below is barely a living income thesedays.
    cinders
    10th Apr 2020
    4:40pm
    I don't mind scrapping franking system provided I'm paid my full share of bottom-line profits to bring to account in tax return just as exisiting unfranked divs are. Past uproar re scrapping franked div system & the 30% franking credit being retained by Govt demonstrates just how many are below 32.5% income tax rate which starts at $37,001, but they happen to have a few shares acquired when they could afford to save for when working--- $37,000 p.a. and below is barely a living income thesedays.


    You May Like