Andrew Conway, IPA’s chief executive said the share buyback scheme is particularly unfair on those supporting small business.
People on higher marginal tax rates receiving a dividend have to pay ‘top-up’ tax and as such are much less likely to participate in share buyback schemes, according to Mr Conway.
“This creates an inequitable distribution of franking credits and reduces the attraction of buybacks for specific groups of taxpayers. Off-market buybacks are mostly attractive to low-tax paying shareholders," he said.
Mr Conway said the current policy is inequitable and the issue should be considered in future tax reform to ensure all taxpayers receive the same treatment.
“For entities that pay no tax and superannuation funds paying no or up to 15 per cent tax, share buybacks can be a genuine benefit as they receive the additional incentive of an imputation rebate from the government.”
“While buybacks may be a useful tool for corporate entities in terms of capital management, they come at a cost to the taxpayer, as treasury coffers miss out on top-up tax due to skewed distribution of franking credits," he explained.
With Telstra announcing a share buyback, and more large corporates expected to follow, Mr Conway said now is the time to consider the tax treatment of share buybacks for the benefit of all taxpayers as well as for the benefit of companies that are offering share buybacks.
“The government should seriously look at the artificial streaming of franking credits which buybacks create,” Mr Conway said.