Could franking credits and dividends be used to fund stimulus?

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?

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Written by Leon Della Bosca

Leon Della Bosca is a voracious reader who loves words. You'll often find him spending time in galleries, writing, designing, painting, drawing, or photographing and documenting street art. He has a publishing and graphic design background and loves movies and music, but then, who doesn’t?
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