Telstra chair: you can't blame companies for avoiding tax
Dividend imputation is hurting Australia's efforts to create more national champions in business and should be offered up as a bargaining chip to pay for company tax cuts, business leaders say.
But they told The Australian Financial Review JPMorgan Chanticleer lunch that the political climate was too prickly for a cut in the tax rate for large corporations.
The Turnbull government's election plan for a cut in the company tax rate from 30¢ in the dollar today to 25¢ over nine years were slammed by Labor as a gift to the top end of town and has run into stiff opposition in the Senate.
Mike Fitzpatrick, AFL chairman and former Rio Tinto director, said dividend franking "is a beautiful, fair, elegant concept" but if we want more national champions like blood products group CSL "then I think it is potentially quite difficult and damaging".
Under dividend imputation, Australian taxpaying companies can attach franking credits to dividends that Australian resident shareholders can use to reduce their personal income tax liability. Franking credits are not usable by foreign-resident shareholders to reduce their tax liability and taxes paid in foreign jurisdictions do not give rise to franking credits.
The system was introduced by then treasurer Paul Keating in the 1980s to avoid double taxation but has not been adopted in other comparable economies except New Zealand.
Mr Fitzpatrick said the interplay of those rules meant companies receiving dividends from foreign subsidiaries faced an "incredibly difficult" challenge to preserve franking credits. One reason Australian banks gave for not expanding overseas is "they get started, they start to develop this huge dividend franking problem".
"If there's a great trade-off between a material drop in the tax rate and franking then I think that would be a transaction worth thinking about," Mr Fitzpatrick said.
He said Rio and fellow mining giant BHP Billiton had not adopted dual British-Australian listings for tax reasons but the structure did help them stream dividends and manage their franking credits.
Telstra chairman John Mullen was unsure about the chances of getting a company tax cut up in the current political environment.
"I think unless we can get a really constructive bipartisan debate about tax I think we are just kidding ourselves because we're not going to get there," Mr Mullen said.
"Trying to sell to the ordinary person in the street that if you reduce the tax for large corporations in 10 years' time it's going to give them an economic benefit is just unsaleable in today's populist world.
"It may be the best economic theory that there is but I don't think it will wash with a sort of Trump-Brexit type voting reaction to things being done by government and business."
But Mr Mullen said the government's latest proposal of pushing for a tax cut for firms with revenues up to $50 million was a good idea because "people can relate more to those small businesses" and "understand what it is, whether you are running a small shop or something like that".
Elizabeth Bryan, chairman of insurance group IAG and airline Virgin Australia, agreed that dividend imputation had become a hindrance but said she wasn't sure a cut in the company tax rate would automatically fix everything.
"We are capital importing country. We are going to see more and more foreign capital flow in to our companies as part of our shareholders. It's by and large a good thing for Australia," Ms Bryan said.
"Managing franking credits where you can't distribute it to your foreign investors is very difficult, and it's trapped value that's very difficult to release.
"So it had its purpose when it was introduced. Whether that purpose still really exists now and is [as] strong as it used to be given where we are going to go with foreign investment, I'd put a question over it."
But she said it was "an open question" whether a drop in the tax rate would "automatically fix the country, fix the budget and make everyone happy".
