Home / Sisson in defence of dividend imputation

Andrew Sisson
While investment managers explore new products to provide income for retirees, no-one should underestimate the importance of Australia’s dividend franking system, according to veteran fund manager Andrew Sisson, managing director of Balanced Equity Management, a member of the Franklin Templeton Group.
Speaking at the annual Frontier Advisors conference, Sisson said critics complaining that the system did not offer a level playing field were wrong. He said that, if franking was abolished, company profits would be taxed at 64 per cent against the effective 41.4 per cent under the present system.
The dividend imputation system was instituted by Treasurer Paul Keating in 1986-87 with the aim of avoiding shareholders’ dividends being taxed twice (once by the company and second as income in shareholders’ hands).
Debate since this year’s discussion paper on taxation raised queries about whether the franking credits system has caused investors to worry that the concession might be dropped. Sisson said he would be very surprised if this happened. If any move came, it was more likely to see the ending of the practice of the ATO not sending out cheques for franking credits – which would penalise pension funds and retirees receiving pensions.
He said it was a good tax system which gave companies an incentive to pay out dividends while retaining the flexibility to raise more capital. It also meant that companies paid the same tax whether they used debt or equity capital. Companies using debt paid less tax with interest deductibility and this balanced the effect of franking credits.
The system also gave Australian companies an incentive to pay Australian tax in preference to foreign tax. This, in turn, encouraged a “home bias” by Australian investors. Sisson estimated franking credits added perhaps 1-2 per cent to returns which he thought was “just about right.”
– Barrie Dunstan