Australian Foundation Investment Company gives tax grab warning over dividends

MANY retirees could be forced on to age pensions if they lose tax credits on dividends, Australia’s biggest listed investment company has warned.

Australian Foundation Investment Company general manager Geoff Driver says retirees would have less income if the dividend imputation system were scrapped.

Higher demand for age pensions would likely be one of the undesirable consequences if the Federal Government moved to abolish the system, Mr Driver told BusinessDaily.

He was speaking after the Government last week released a discussion paper on taxation reform that took aim at tax credits on dividends.

Introduced by the Hawke government in the late 1980s, the dividend imputation system is designed to ensure investors do not pay tax on company earnings that have already been taxed.

The report said the system was complex and flawed.

While it increased returns to Australian investors, it reduced their incentive to look beyond the local sharemarket, discouraged local companies from investing overseas and did little to attract foreign investment, it said.

But Mr Driver shot back at critics of the system, saying those calling for its abolition were asking for the reintroduction of double taxation on company income.

Changing the system would be a “tough sell”, he said.

Speaking with shareholders in Perth last week, AFIC chairman Terry Campbell had received a spontaneous round of applause when he mounted a defence of the system, Mr Driver said.

“If you cut imputation, retirees will have less income to survive on and go back to pensions I expect,” he said.

“If you take from one thing it has implications elsewhere.”

AFIC has a $6.5 billion portfolio of locally listed shares with stakes in many blue-chip companies that give it a voice in the nation’s boardrooms.

One of the group’s goals is to pay dividends that grow faster than the rate of inflation.

Founded by stockbroker JBWere for its clients in 1962, the listed investment company has paid a dividend each year since. As of last year, it had more than 100,000 retail shareholders.

Mr Driver said the dividend imputation system had served investors and the nation well and was being blamed, without merit, for problems in the wider economy.

“Some of the issues being raised about access to capital — we don’t think proof is there that that has occurred,” he said.

“A lack of investment is not caused by imputation — it is a lack of opportunities.”

He said the dividend imputation system caused companies to be more disciplined about their use of retained earnings.

Mr Driver said shareholders would back companies that reinvested their earnings in pursuit of growth if they could make a strong case for it.