Daily Bulletin


The Conversation

  • Written by The Conversation
imageCommonwealth Bank shareholders continue to be rewarded with high dividends, despite the bank needing to raise capital.Dan Peled/AAP

As another corporate reporting season in Australia draws to a close, the broad trend has been moderately underwhelming earnings results, combined with a rise in the earnings repaid to shareholders in the form of a dividend.

During this recent reporting period Australian firms returned, on average, 73% of their profits to shareholders as a dividend. This leaves only 27% of profits available to be retained in the firm to fund future growth.

As shown in the chart below, the ratio of profits paid out as dividends has increased in Australia from approximately 60% in 2005 to the current value of 73%. This result mirrors a recent international trend, however Australian firms continue to have high dividend payout ratios by international standards. The average firm around the world currently only returns 44% of profits to shareholders.

While many retail investors enjoy the regular revenue stream provided by the high yielding Australian equity market, this increasing trend in dividend payout ratios implies that dividends have consistently been growing at a faster rate than earnings; a phenomena that is not sustainable in the long-run and comes at the cost of economic growth.

A taxing issue

The large proportion of profits paid by Australian firms can largely be attributed to the imputation tax system, which was introduced in 1987 as a means of removing the double taxation of dividends. It allows companies to provide investors with a rebate for company tax that has been paid in the form of a franking credit attached to dividends.

Dividend imputation has achieved its intended aim of reducing the leverage of Australian firms. It’s an incentive for the use of equity rather than debt finance. Under the previous tax system, debt was more attractive than equity finance, resulting in the Australian economy having a large exposure to financial risk given the highly levered nature of many firms.

However, this reduction in financial risk has come at the cost of significant under-investment in the non-mining sectors of the Australian economy. The increased demand for dividends within an imputation tax system restricts firms’ access to their preferred source of financing: retained earnings.

The reinvestment of retained earnings creates multiplier effects that have a greater positive impact on the economy compared with dividends in the hands of individual shareholders. By retaining less of their earnings and under-investing compared with international counterparts, Australian firms run the risk of lagging behind.

Time for a policy fix?

Given the Australian government is currently focused on driving investment and growth in the non-mining sectors as the key mechanism for improving the current fiscal imbalance, consideration may have to be given to the future efficacy of the imputation tax system and the incentives it creates for large dividend payouts.

The imputation tax system is less relevant today than it was in 1987, given the increased integration between global markets and the growing reliance on international funding. As the tax benefits of the imputation tax system can only be accessed by Australian taxpayers, it creates a bias in favour of domestic investors.

For domestic superannuation funds with a marginal tax rate close to zero, the imputation tax system means they pay little, if any, tax on dividends, creating a big incentive for over-exposure to domestic equities. Given the structural changes that have occurred since 1987, the recent Financial System Inquiry noted that “the case for retaining dividend imputation is less clear than in the past”.

An alternative tax system that does not impose double taxation on investors while potentially reducing the current handbrake on economic growth is Singapore’s one-tier tax system. Under this system, profits are only taxed once at the corporate level. In Singapore dividends and capital gains are tax exempt. This simplified tax system reduces compliance costs and would ease the domestic investors' current demand for dividends, and their associated franking credits, to be paid out.

Regardless of any taxation reform, investors need to be mindful that they can’t have their cake and eat it too with respect to dividends. The current trend of increasing the proportion of profits paid as dividends is not sustainable and has the potential to impede Australia’s long-run economic growth.

Paul Docherty receives funding from Platypus Asset Management.

Authors: The Conversation

Read more http://theconversation.com/australias-appetite-for-dividends-could-cannibalise-economic-growth-46403

Writers Wanted

Love in the time of algorithms: would you let your artificial intelligence choose your partner?

arrow_forward

A Brief Overview of Australian Gun Laws

arrow_forward

The Conversation
INTERWEBS DIGITAL AGENCY

Politics

Prime Minister's Remarks to Joint Party Room

PRIME MINISTER: Well, it is great to be back in the party room, the joint party room. It’s great to have everybody back here. It’s great to officially welcome Garth who joins us. Welcome, Garth...

Scott Morrison - avatar Scott Morrison

Prime Minister Interview with Ben Fordham, 2GB

BEN FORDHAM: Scott Morrison, good morning to you.    PRIME MINISTER: Good morning, Ben. How are you?    FORDHAM: Good. How many days have you got to go?   PRIME MINISTER: I've got another we...

Scott Morrison - avatar Scott Morrison

Prime Minister Interview with Kieran Gilbert, Sky News

KIERAN GILBERT: Kieran Gilbert here with you and the Prime Minister joins me. Prime Minister, thanks so much for your time.  PRIME MINISTER: G'day Kieran.  GILBERT: An assumption a vaccine is ...

Daily Bulletin - avatar Daily Bulletin

Business News

Getting Ready to Code? These Popular and Easy Programming Languages Can Get You Started

According to HOLP (History Encyclopedia of Programing Languages), there are more than 8,000 programming languages, some dating as far back as the 18th century. Although there might be as many pr...

News Co - avatar News Co

Avoid These Mistakes When Changing up Your Executive Career

Switching up industries is a valid move at any stage in your career, even if you’re an executive. Doing so at this stage can be a lot more intimidating, however, and it can be quite difficult know...

News Co - avatar News Co

4 Costly Mistake To Avoid When Subdividing Your Property

As a property developer or landowner, the first step in developing your land is subdividing it. You subdivide the property into several lots that you either rent, sell or award to shareholders. ...

News Co - avatar News Co



News Co Media Group

Content & Technology Connecting Global Audiences

More Information - Less Opinion