Dividends will flow before Tony’s tax cut

World markets are telling Tony Abbott that he has come to power at a good time. Whether it is in the US, Europe or China the base economic indicators are looking better and share markets are responding favourably.

And some stocks in the Australian share market will soon get a boost from left field – the number of companies making special dividend payment distributions will rise because of Tony Abbott’s proposed tax cut and the fact that so many Australian companies are awash with cash.

In 2015-16 franking will be at a 28.5 per cent tax rate, compared to 30 per cent now. 

At the moment a fully franked $100 dividend is worth $142.8 on the basis of a 30 cent in the dollar tax rate. With the lower profits tax of 28.5 cents in the dollar the $100 dividend will be worth $139.7 – a reduction of 3.1 cents or 2.2 per cent.

In the 2013-14 and 2014-15 financial years many companies with low gearing and undistributed franking credits will make special payments to shareholders because in 2015-16 companies that have undistributed franking credits will have to increase the dollars they distribute to maintain a $142.8 distribution rate. Accordingly if franking credits are not distributed before July 1, 2015 then it will require additional profits to distribute them because the franking rate declines from 30 per cent to 28.5 per cent.

And the profits of the 3,200 largest companies – which are where most Australians have invested their money – do not rise with the lower tax rate because a 1.5 per cent levy has been imposed. That levy does not qualify for franking credits because it is part of the intergenerational payment that treasurer Joe Hockey used to fund the parental leave scheme (Retirees will pay for the Paid Parental Leave scheme, August 19).

But of course special dividend payments will normally only be made if trading is good and there is not a major expansion on the horizon.  

And the pressure for special payments comes as global economic improvement is causing interest rates to edge up in most markets, as it is clear that the days of quantitative easing are numbered and that it will be gradually wound down during 2014.