Shareholders could be hurt twice by Coalition’s paid parental leave scheme

The Coalition’s paid parental leave scheme will hurt shareholders in listed companies, according to media reports.

Over the past 24 hours, numerous media outlets have claimed the opposition’s 1.5% levy on companies earning more than $5 million in taxable income will not be put towards franked dividends (dividends on which no more tax must be paid).

SmartCompany called both opposition treasurer Joe Hockey and opposition deputy treasurer Mathias Cormann to confirm the reports, but received no response before deadline.

The Coalition will release its costings on the paid parental leave scheme in a few days. The costings will presumably contain more detail on whether or not companies will be able to put the levy towards offering franked dividends.

The Greens, who are proposing a very similar scheme to the Coalition’s, released their costings this morning. Those costings show that not allowing the levy to count towards franked dividends would save the government $1.6 billion every eyar the scheme is fully running, which would help offset its cost. 

Corporate Tax Association executive director Frank Drenth told SmartCompany this morning that if the levy does not get put towards franking credits, it will be a “double whammy” for shareholders.

“They’ll already face lower after-tax profits, which will impact dividends, and all other things being equal have an impact on share prices.

“And then, when they receive a dividend, they’ll still have to pay tax on it, because it won’t be franked.”

Currently, there exists a narrow range of taxes which companies can count towards offsetting the tax paid by their shareholders on corporate dividends.

Franking of dividends is a very positive feature of the Australian sharemarket and has encouraged retail shareholders to own shares, Drenth says.

“One impact of having the credits for company tax flow through to shareholders is that it’s encouraged companies, particularly listed companies, to actually pay more tax, or pay their tax bill earlier than they need to, because the directors are confident the shareholders are attracted to franking credits.

“It’s the single most effective integrity feature in the corporate tax system. So you’d want to think very carefully about impacting that.”

Pitcher Partners partner Greg Nielsen agrees that franking has helped encourage share ownership in Australia.

However, he stressed caution in reacting to the news about the franking status of the levy.

“I’m still trying to get to the bottom of it,” he told SmartCompany. “I haven’t been able to immediately identify what within the Coalition’s statements is leading people to say that. I’m not saying it’s not true, just that I’ve yet to see an official statement about it.

Nielsen says he’s more concerned about the low threshold of the levy.

“If we’re talking about companies generating $5 million or more in income, many of these will fall within the SME segment of businesses in Australia,” he said.

“They’re a very important segment of Australian businesses, in terms of their contribution to GDP and employment. So anything that adds a further cost to these companies doing business is going to have far-reaching implications for the Australian economy. I don’t think that should be played down.”