1 00:00:04,140 --> 00:00:06,420 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,510 --> 00:00:09,930 Sean Aylmer: Aylmer. A key incentive for people to invest in shares 3 00:00:10,050 --> 00:00:14,100 Sean Aylmer: is the tax imputation system. Put simply, franking means that a 4 00:00:14,100 --> 00:00:17,280 Sean Aylmer: profit earned by a company isn't taxed a second time 5 00:00:17,460 --> 00:00:20,579 Sean Aylmer: when it's distributed to shareholders. But now one of Australia's 6 00:00:20,579 --> 00:00:24,060 Sean Aylmer: leading investors is campaigning against some of the changes made 7 00:00:24,060 --> 00:00:27,570 Sean Aylmer: to the franking credit system in last week's budget. Remember, this 8 00:00:27,570 --> 00:00:30,060 Sean Aylmer: is general information and only, and you should seek professional 9 00:00:30,060 --> 00:00:33,450 Sean Aylmer: advice before making any investment decisions. We've spoken on many 10 00:00:33,450 --> 00:00:36,600 Sean Aylmer: occasions to the team from Wilson Asset Management. They manage 11 00:00:36,600 --> 00:00:39,750 Sean Aylmer: eight listed investment companies with almost $ 5 billion in shareholder 12 00:00:39,750 --> 00:00:44,010 Sean Aylmer: capital on behalf of more than 130,000 retail investors. Geoff 13 00:00:44,010 --> 00:00:47,370 Sean Aylmer: Wilson, AO, is the founder, Chairman and Chief Investment Officer 14 00:00:47,580 --> 00:00:50,940 Sean Aylmer: of Wilson Asset Management. Geoff, welcome back to Fear and Greed. 15 00:00:51,300 --> 00:00:52,920 Geoff Wilson: Thanks Sean. Good to be here. 16 00:00:53,220 --> 00:00:56,700 Sean Aylmer: Now in English, take me through the changes in the 17 00:00:56,700 --> 00:00:57,690 Sean Aylmer: budget last week. 18 00:00:57,960 --> 00:01:00,450 Geoff Wilson: Yeah, okay. I'll go through the changes. And to me 19 00:01:00,450 --> 00:01:03,630 Geoff Wilson: the biggest thing is the implications for those changes. 20 00:01:03,990 --> 00:01:04,320 Sean Aylmer: Yes. 21 00:01:04,950 --> 00:01:07,740 Geoff Wilson: And probably we go back a bit further. Say we 22 00:01:07,740 --> 00:01:12,600 Geoff Wilson: go back three or four weeks ago. Treasury, obviously a 23 00:01:12,600 --> 00:01:16,289 Geoff Wilson: new government's in so Treasury's gone to them and said, " 24 00:01:16,290 --> 00:01:18,540 Geoff Wilson: Hey look, we need to raise some money to repair 25 00:01:18,540 --> 00:01:21,780 Geoff Wilson: the budget. These are all some places you can get 26 00:01:21,780 --> 00:01:26,370 Geoff Wilson: some money." One of them was by stopping companies that 27 00:01:26,430 --> 00:01:31,110 Geoff Wilson: pay fully franked dividends if that fully franked dividend is associated 28 00:01:31,110 --> 00:01:34,440 Geoff Wilson: with the capital raising of any magnitude, to help pay 29 00:01:34,440 --> 00:01:39,300 Geoff Wilson: that dividend before or after the dividends paid. And they were 30 00:01:39,360 --> 00:01:43,290 Geoff Wilson: asking for submissions or commentary and then the government was 31 00:01:43,290 --> 00:01:46,440 Geoff Wilson: going to look at it. So initially, we were nervous 32 00:01:46,440 --> 00:01:49,470 Geoff Wilson: then in terms of the government doesn't quite understand what's 33 00:01:49,470 --> 00:01:55,980 Geoff Wilson: going on because they're immediately breaking an election promise, or 34 00:01:56,220 --> 00:01:59,640 Geoff Wilson: there was something a bit more sinister occurring. Once we 35 00:01:59,640 --> 00:02:02,790 Geoff Wilson: saw the budget come out and where it's said there 36 00:02:02,790 --> 00:02:08,730 Geoff Wilson: that companies that do buybacks and allow people to get 37 00:02:08,730 --> 00:02:11,700 Geoff Wilson: a fully franked dividend as part of that buyback, the 38 00:02:11,700 --> 00:02:16,829 Geoff Wilson: plan is to stop that from occurring. And the difficult 39 00:02:16,830 --> 00:02:23,310 Geoff Wilson: thing, and I was angry initially, I feel actually pity for 40 00:02:23,310 --> 00:02:28,049 Geoff Wilson: the government because I actually think they just don't understand 41 00:02:28,050 --> 00:02:32,700 Geoff Wilson: what they're doing. Now, they don't understand the economic consequences 42 00:02:32,700 --> 00:02:37,440 Geoff Wilson: of their behavior because Paul Keating set this system in 43 00:02:37,440 --> 00:02:42,120 Geoff Wilson: place and I was reading an article he wrote in 44 00:02:42,150 --> 00:02:46,860 Geoff Wilson: 2013 and he said, Treasury does not like the franking 45 00:02:46,860 --> 00:02:50,010 Geoff Wilson: system. And every seven years they'll try to change it. 46 00:02:50,730 --> 00:02:52,830 Geoff Wilson: And so what you've seen is the new government's come 47 00:02:52,830 --> 00:02:56,489 Geoff Wilson: in and they're having the wool pulled over their eyes. 48 00:02:57,060 --> 00:03:01,650 Geoff Wilson: This is obviously Jim Chalmers and Anthony Albanese and the 49 00:03:01,650 --> 00:03:06,810 Geoff Wilson: various other ministers, by Treasury. Because Treasury don't like the other 50 00:03:06,810 --> 00:03:12,780 Geoff Wilson: franking system. What Treasury don't understand is the incredible benefits 51 00:03:12,840 --> 00:03:17,639 Geoff Wilson: of the franking system. People getting caught up about tax 52 00:03:17,639 --> 00:03:21,000 Geoff Wilson: refunds. And I know you mentioned that in your introduction, 53 00:03:21,000 --> 00:03:24,330 Geoff Wilson: but it's really how important the franking system is to the 54 00:03:24,330 --> 00:03:31,139 Geoff Wilson: financial stability of Australia. And we saw back in the GFC, why did 55 00:03:31,139 --> 00:03:34,980 Geoff Wilson: Australia and Australian companies do so well versus the rest 56 00:03:34,980 --> 00:03:37,170 Geoff Wilson: of the world? In this tough period that we're going 57 00:03:37,170 --> 00:03:40,470 Geoff Wilson: to go through, why will Australia companies do so well 58 00:03:41,070 --> 00:03:43,950 Geoff Wilson: versus the rest of the world? It's the Paul Keating 59 00:03:44,370 --> 00:03:48,180 Geoff Wilson: franking system. And that's why. Because what it does, it 60 00:03:48,180 --> 00:03:52,800 Geoff Wilson: encourages Australian companies to pay tax in Australia, to invest 61 00:03:52,800 --> 00:03:57,720 Geoff Wilson: in Australia, to employ Australians. And also normally a company's ... 62 00:03:57,810 --> 00:04:00,150 Geoff Wilson: You're running a company, you've got a decision. Say you 63 00:04:00,150 --> 00:04:03,480 Geoff Wilson: want to expand, you can either borrow money and pay 64 00:04:03,480 --> 00:04:07,110 Geoff Wilson: interest, which is tax deductible or you can raise equity. 65 00:04:07,290 --> 00:04:12,150 Geoff Wilson: Now because of our franking system, it makes equity cheaper for 66 00:04:12,240 --> 00:04:16,919 Geoff Wilson: Australian companies, where globally companies tend to borrow money and 67 00:04:16,920 --> 00:04:19,980 Geoff Wilson: get the benefit of the tax deduction of those interests. And that's 68 00:04:20,400 --> 00:04:22,501 Geoff Wilson: why Australian corporates are so well positioned. 69 00:04:22,501 --> 00:04:27,179 Sean Aylmer: So I just had a couple of, so almost missing links for me. Help me out 70 00:04:27,180 --> 00:04:30,900 Sean Aylmer: here. So franking credits are paid on Australian earnings, not 71 00:04:30,900 --> 00:04:31,830 Sean Aylmer: overseas earnings? 72 00:04:31,830 --> 00:04:37,200 Geoff Wilson: The tax is paid in Australia. So overseas earnings, domestic earnings, if they bring it back to 73 00:04:37,200 --> 00:04:37,710 Geoff Wilson: Australia, the tax has to be paid in Australia. 74 00:04:39,270 --> 00:04:45,721 Sean Aylmer: Why does Treasury not like franking? 75 00:04:45,721 --> 00:04:45,722 Geoff Wilson: Well, they don't understand what it does. 76 00:04:45,722 --> 00:04:47,909 Sean Aylmer: They just see as a leakage from the tax system. Is that 77 00:04:47,910 --> 00:04:48,239 Sean Aylmer: kind of ...? 78 00:04:48,450 --> 00:04:51,450 Geoff Wilson: As simple as that, leakage from the tax system. That's 79 00:04:51,450 --> 00:04:56,190 Geoff Wilson: one dimensional. And unfortunately the Labor government doesn't understand the 80 00:04:56,190 --> 00:04:59,640 Geoff Wilson: consequence of what they're doing. Effectively, It's like say you've 81 00:04:59,640 --> 00:05:02,789 Geoff Wilson: just had a new house built and you can't afford 82 00:05:02,790 --> 00:05:05,370 Geoff Wilson: to pay the electricity, all the electricity in the new 83 00:05:05,370 --> 00:05:08,849 Geoff Wilson: house. You got a blank fuse board and you don't 84 00:05:08,850 --> 00:05:11,460 Geoff Wilson: know which fuse to control what. So that's what the 85 00:05:11,460 --> 00:05:14,789 Geoff Wilson: Labor Government's doing. They're flipping a couple of fuses. What 86 00:05:14,790 --> 00:05:17,520 Geoff Wilson: they don't realize, it's just turned off the engine of 87 00:05:17,520 --> 00:05:20,820 Geoff Wilson: the house. So to me that's what they're doing. They're 88 00:05:20,820 --> 00:05:25,020 Geoff Wilson: in the process of destroying the franking system. What a 89 00:05:25,020 --> 00:05:32,460 Geoff Wilson: normal company makes say $ 100, pays $ 30 tax. What they're 90 00:05:32,460 --> 00:05:37,140 Geoff Wilson: saying is that other $ 70, and most listed companies pay 91 00:05:37,140 --> 00:05:41,730 Geoff Wilson: out half the profit they make. So they pay out $ 35 as a fully 92 00:05:41,730 --> 00:05:50,549 Geoff Wilson: franked dividend. The other half, that $ 35, they invest. They maybe invest in their business, invest in 93 00:05:50,550 --> 00:05:54,270 Geoff Wilson: their product. Well the government, by the two moves that they're 94 00:05:54,270 --> 00:05:59,580 Geoff Wilson: talking about in the last month, is stopping that $ 35 95 00:05:59,790 --> 00:06:03,419 Geoff Wilson: to ever be paid out to shareholders because the only way 96 00:06:03,420 --> 00:06:05,130 Geoff Wilson: you can pay that out the shareholders going forward, you 97 00:06:05,130 --> 00:06:09,870 Geoff Wilson: can't raise capital, you can't do a buyback. The only 98 00:06:09,870 --> 00:06:13,650 Geoff Wilson: way is borrow more money. So they're either encouraging companies 99 00:06:13,650 --> 00:06:16,440 Geoff Wilson: to borrow more money and take more risk and pay out those 100 00:06:16,710 --> 00:06:21,330 Geoff Wilson: fully franked dividends or not invest in your business and pay 101 00:06:21,330 --> 00:06:25,589 Geoff Wilson: them out as fully franked dividends. They're creating the wrong behavior. 102 00:06:26,070 --> 00:06:30,690 Sean Aylmer: So every investor gets dividends, but at least anecdotally, the 103 00:06:30,690 --> 00:06:34,770 Sean Aylmer: people who will be hit hardest here potentially are retirees 104 00:06:34,770 --> 00:06:36,930 Sean Aylmer: because many of them live on their dividends. 105 00:06:37,830 --> 00:06:41,339 Geoff Wilson: Well to me the annoying or frustrating part is in terms of 106 00:06:41,460 --> 00:06:45,239 Geoff Wilson: professional fund managers, we don't participate in those buybacks because 107 00:06:45,240 --> 00:06:47,760 Geoff Wilson: we want the highest price possible. Now in terms of, 108 00:06:48,089 --> 00:06:52,170 Geoff Wilson: we'll let our shareholders work out their tax positions. So 109 00:06:52,230 --> 00:06:55,980 Geoff Wilson: it's really the people that participate in those, the buybacks 110 00:06:55,980 --> 00:06:58,830 Geoff Wilson: or the major beneficiaries of them, are the mums and 111 00:06:58,830 --> 00:07:01,830 Geoff Wilson: dads. The people that have worked all their life, done 112 00:07:01,830 --> 00:07:05,430 Geoff Wilson: the right thing and they live on their, say fully 113 00:07:05,430 --> 00:07:08,279 Geoff Wilson: franked dividends, haven't gone to the government for support, have 114 00:07:08,279 --> 00:07:10,920 Geoff Wilson: their self- managed super funds or the low income earners. 115 00:07:12,060 --> 00:07:15,330 Geoff Wilson: I'm on the maximum tax rate 48 and a bit percent. 116 00:07:15,720 --> 00:07:19,500 Geoff Wilson: I don't want fully frank dividends because there's only 30% 117 00:07:19,500 --> 00:07:20,910 Geoff Wilson: tax paid on it. So I got to pay the other 118 00:07:21,150 --> 00:07:24,780 Geoff Wilson: 18% tax. Yeah, I'm better off getting in the capital gain and 119 00:07:24,780 --> 00:07:26,700 Geoff Wilson: I only pay half my tax rate on the capital 120 00:07:26,700 --> 00:07:32,400 Geoff Wilson: gain. So it's not the rich this is impacting which 121 00:07:32,400 --> 00:07:35,610 Geoff Wilson: annoys me and frustrates me. It's the ignorance of the 122 00:07:35,610 --> 00:07:38,940 Geoff Wilson: government not understanding how the system works, having the wool 123 00:07:38,940 --> 00:07:43,110 Geoff Wilson: pulled over their eyes by Treasury. And on the other 124 00:07:43,110 --> 00:07:46,170 Geoff Wilson: side, the people that are going to get impacted are 125 00:07:46,170 --> 00:07:51,750 Geoff Wilson: the self- managed super funds, the low income earners. If you're on a 126 00:07:52,470 --> 00:07:56,460 Geoff Wilson: really low income, then obviously you get the significant benefit 127 00:07:56,460 --> 00:07:57,210 Geoff Wilson: of franking credits. 128 00:07:57,840 --> 00:07:59,730 Sean Aylmer: Stay with me Geoff, we'll be back in a minute. 129 00:08:05,880 --> 00:08:08,820 Sean Aylmer: I'm speaking to Geoff Wilson, Chairman and Chief Investment Officer 130 00:08:09,000 --> 00:08:12,930 Sean Aylmer: of Wilson Asset Management. It's eating away at the franking 131 00:08:12,930 --> 00:08:15,540 Sean Aylmer: system by stealth. So far we've had two examples now 132 00:08:15,540 --> 00:08:17,910 Sean Aylmer: in the last four weeks. Do you expect it to 133 00:08:17,910 --> 00:08:21,030 Sean Aylmer: keep going? Where do you think the government's heading on 134 00:08:21,030 --> 00:08:23,220 Sean Aylmer: this, or where do you think Treasury's heading on this 135 00:08:23,220 --> 00:08:24,090 Sean Aylmer: might be a better question. 136 00:08:24,900 --> 00:08:29,280 Geoff Wilson: Well, what I'm hoping, and the reason why we are 137 00:08:29,340 --> 00:08:34,140 Geoff Wilson: incredibly vocal, I mean you're aware of the money and effort and 138 00:08:34,140 --> 00:08:38,939 Geoff Wilson: resources we committed to the franking campaign, the retirement tax. 139 00:08:38,940 --> 00:08:42,689 Geoff Wilson: Yeah. I think this is retirement tax 2. 0. Back 140 00:08:42,690 --> 00:08:47,189 Geoff Wilson: in the initial retirement tax that the Labor opposition, which 141 00:08:47,460 --> 00:08:50,220 Geoff Wilson: ended up not winning the election in 2019 was trying, 142 00:08:50,580 --> 00:08:54,059 Geoff Wilson: now from March till the election, so a year and 143 00:08:54,059 --> 00:08:57,570 Geoff Wilson: a quarter, we committed significant resources to run a campaign 144 00:08:57,570 --> 00:09:02,220 Geoff Wilson: to stop that. And we will commit equally those resources, 145 00:09:02,220 --> 00:09:05,160 Geoff Wilson: if not more, to run a campaign to stop this 146 00:09:05,160 --> 00:09:06,900 Geoff Wilson: occurring as well. It's still got to get through the 147 00:09:06,900 --> 00:09:11,460 Geoff Wilson: Senate, so nothing's cast in stone. So let's hope that the 148 00:09:11,460 --> 00:09:15,450 Geoff Wilson: rest of the people that were impacted back then come 149 00:09:15,450 --> 00:09:19,110 Geoff Wilson: out and tell the government what they think. You got 150 00:09:19,110 --> 00:09:21,390 Geoff Wilson: to remember, the government's only got a one seat majority. 151 00:09:22,080 --> 00:09:24,210 Geoff Wilson: So to me this is the end of their honeymoon. 152 00:09:24,630 --> 00:09:28,530 Geoff Wilson: To me the really, not much has to change. Now only 153 00:09:28,530 --> 00:09:33,300 Geoff Wilson: a small change will have significant consequences for the government. 154 00:09:34,020 --> 00:09:38,309 Geoff Wilson: And what is concerning is back in 2019, they stopped 155 00:09:38,309 --> 00:09:42,449 Geoff Wilson: the individuals with an inequitable strategy. But trying to stop 156 00:09:42,450 --> 00:09:45,270 Geoff Wilson: some individuals, if you're in an industry fund, you got the 157 00:09:45,270 --> 00:09:48,179 Geoff Wilson: franking. If you're went on a pension before the 28th 158 00:09:48,179 --> 00:09:52,290 Geoff Wilson: of February, 2018 you got the franking. If you happen to be born three 159 00:09:52,290 --> 00:09:54,660 Geoff Wilson: or four days later, then you miss out on the 160 00:09:54,660 --> 00:09:56,850 Geoff Wilson: franking. If you're an industry fund, you got the franking. 161 00:09:57,540 --> 00:09:59,730 Geoff Wilson: So to me it was just so unfair and illogical, 162 00:09:59,730 --> 00:10:02,160 Geoff Wilson: but that they were trying to stop the individuals from 163 00:10:02,160 --> 00:10:05,940 Geoff Wilson: getting to franking. Now this time they're trying to stop the 164 00:10:05,940 --> 00:10:09,510 Geoff Wilson: companies from getting the franking. Now in terms of, I talked 165 00:10:09,510 --> 00:10:13,800 Geoff Wilson: about that example of $ 100 and that $ 35 that you 166 00:10:13,800 --> 00:10:18,540 Geoff Wilson: invest in your business and $ 35 you pay out in dividends. We're still 167 00:10:18,540 --> 00:10:21,689 Geoff Wilson: running the numbers, but it looks like that's $ 30 billion 168 00:10:22,080 --> 00:10:24,390 Geoff Wilson: a year that's not paid out. It won't be paid 169 00:10:24,390 --> 00:10:28,590 Geoff Wilson: out at fully franked dividends. So what that means is, I 170 00:10:28,590 --> 00:10:31,109 Geoff Wilson: think probably the government, the next move, and there was a 171 00:10:31,110 --> 00:10:34,679 Geoff Wilson: lot of talk that would happen, is really trying to 172 00:10:34,740 --> 00:10:38,220 Geoff Wilson: decrease the size of self- managed super funds. So there's 173 00:10:38,940 --> 00:10:41,429 Geoff Wilson: again, go back to the individual, try to make the 174 00:10:41,429 --> 00:10:44,220 Geoff Wilson: franking less valuable to them, but they could use less franking. 175 00:10:44,970 --> 00:10:48,809 Geoff Wilson: And then what really concerns me is what happens eventually, 176 00:10:48,809 --> 00:10:52,410 Geoff Wilson: and like Paul Keating mightn't still be alive when this 177 00:10:52,410 --> 00:10:55,679 Geoff Wilson: happens, but he'll turn in his grave if he is, 178 00:10:55,679 --> 00:11:00,420 Geoff Wilson: they'll abandon the franking system. Very similar to what happened 179 00:11:00,420 --> 00:11:03,030 Geoff Wilson: in the UK. To me it was just ignorance. They 180 00:11:03,030 --> 00:11:05,400 Geoff Wilson: had a similar system to the franking system back, they 181 00:11:05,400 --> 00:11:10,410 Geoff Wilson: introduced 1977 and that was disbanded I think 20 odd 182 00:11:10,410 --> 00:11:14,010 Geoff Wilson: years later. So what'll eventually happen, if Labor's in power, 183 00:11:14,280 --> 00:11:17,550 Geoff Wilson: then they'll say, " Look, the system doesn't really work. You're 184 00:11:17,550 --> 00:11:19,949 Geoff Wilson: only using half of the benefit of franking because the other 185 00:11:19,950 --> 00:11:22,530 Geoff Wilson: half, we've blocked it so you can't use it. Or 186 00:11:22,530 --> 00:11:26,459 Geoff Wilson: it could even be less and you really don't get 187 00:11:26,460 --> 00:11:28,950 Geoff Wilson: that much benefit. So look, why don't we just remove 188 00:11:28,950 --> 00:11:32,429 Geoff Wilson: the system?" So then we're just another player in the 189 00:11:32,429 --> 00:11:38,069 Geoff Wilson: world stage. Now a financial system is like everyone else, cyclicality increases, 190 00:11:38,850 --> 00:11:42,599 Geoff Wilson: the cost of capital increases for all Australian companies, Australian 191 00:11:42,600 --> 00:11:45,540 Geoff Wilson: companies don't bother about investing in Australia, they're better off 192 00:11:45,540 --> 00:11:50,190 Geoff Wilson: investing overseas. Like Bill Shorten said in 2019 and Chris 193 00:11:50,190 --> 00:11:53,309 Geoff Wilson: Bowen, they said, we're going to change the franking system. You 194 00:11:53,309 --> 00:11:57,420 Geoff Wilson: should invest more overseas. To me, I don't believe that's the best for Australia. 195 00:11:57,420 --> 00:12:04,620 Geoff Wilson: So to me, I am incredibly frustrated, initially angry, and 196 00:12:04,620 --> 00:12:08,850 Geoff Wilson: now feeling I just can't believe how stupid the current 197 00:12:09,750 --> 00:12:10,890 Geoff Wilson: Labor party has been. 198 00:12:11,520 --> 00:12:14,340 Sean Aylmer: Well Geoff, from an investor's viewpoint, good luck with it 199 00:12:14,460 --> 00:12:16,530 Sean Aylmer: because it is worth fighting for. And thank you for 200 00:12:16,530 --> 00:12:17,640 Sean Aylmer: talking to Fear and Greed. 201 00:12:18,450 --> 00:12:18,900 Geoff Wilson: Thank you Sean. 202 00:12:18,900 --> 00:12:22,800 Sean Aylmer: That was Geoff Wilson, AO, founder, Chairman, and Chief Investment 203 00:12:22,800 --> 00:12:25,830 Sean Aylmer: officer of Wilson Asset Management. This is the Fear and 204 00:12:25,830 --> 00:12:28,470 Sean Aylmer: Greed daily interview. Remember, you should get professional advice before 205 00:12:28,470 --> 00:12:31,230 Sean Aylmer: making any investment decisions. Join us every morning for the 206 00:12:31,230 --> 00:12:33,929 Sean Aylmer: full episode of Fear and Greed, Australia's most popular business 207 00:12:33,929 --> 00:12:35,969 Sean Aylmer: podcast. I'm Sean Aylmer. Enjoy your day.