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Dividend imputation: is there a case for change?

In a special section of JASSA: The FINSIA Journal of Applied Finance, leading academics explore the effects of the dividend imputation system on the Australian finance sector.

The pros and cons of scrapping dividend imputation

In a low-growth economy any barrier to future growth is fair game to be considered for removal, so it should come as no surprise that Australia’s beloved dividend imputation system is the target of some debate.


Dividend imputation and the Australian financial system

By Kevin Davis

There is ongoing debate about the precise effects of the dividend imputation system on the Australian financial sector, company and investor behaviour, and real sector consequences. In discussions about the costs, benefits and the future of imputation, a critical but largely ignored issue is the need to identify the appropriate counterfactual. Any alternative will involve some differences between Australian and overseas tax systems and differential treatment between investors, which will involve various types of distortions. Based on the available evidence, this paper argues that the benefits of imputation outweigh its costs. Moreover, the disruption to financial markets caused by substantive change such as abolishing imputation would be substantial.


The impact of dividend imputation on share prices, the cost of capital and corporate behaviour

By Andrew Ainsworth, Graham Partington and Geoffrey J Warren

Debate continues about how dividend imputation affects equity markets. Central issues are whether franking credits are ‘priced’ by the market, and how imputation influences the behaviours of market participants. We argue that the presence of imputation affects investor and corporate behaviour, and that it would be dangerous to assume imputation has no effect on prices because they are entirely determined in global markets. Focusing on the impact on corporate behaviour, especially with regard to dividend payout and capital structure policies, we conclude that imputation matters and it has probably been beneficial.


Dividend imputation and the corporate cost of capital

By Stephen Gray

The contentious debate about how to best estimate the value of imputation credits has been heightened in the regulatory setting. While an accurate estimate of the cost of capital is important for every firm, it is particularly important for regulated infrastructure firms where a regulator sets the allowed revenue each year in accordance with its estimate of the cost of capital. This paper explains how the regulatory allowance depends on the estimated value of imputation credits and summarises the debate that has occurred, over many years, in this setting.


Dividend imputation: The international experience

By Andrew Ainsworth

An overlooked aspect of the debate surrounding Australia’s dividend imputation system is the international experience with dividend imputation. Between 1999 and 2008, nine countries removed their dividend imputation systems. This raises a number of questions. What was the motivation for removing imputation? How were dividends taxed after imputation was removed? What happened to corporate tax rates? What are the lessons for Australia? This paper seeks to provide answers to these questions.