In this update we examine the impact of the reduction in the corporate tax rate and the impact on the Listed Investment Company (LIC) space. The change is retrospective and there are reporting obligations that LICs should be aware of in the lead up to announcing FY2017 Dividends and post-tax monthly NTA disclosures.
In the 2016-17 budget, the Australian Government announced it intended to progressively reduce the corporate tax rate from 30% to 25%. The change to the corporate tax rate is retrospectively effective from 1 July 2016. For LICs with an aggregated annual turnover threshold of less than $10m, the applicable corporate tax rate is 27.5%.
This retrospective application has impacted LICs that have declared or paid dividends fully franked to 30% during the 2016-17 financial year.
An article in the AFR by Vesna Poljak on 1 August 2017 highlighted confusion in the market as to whether the $10m threshold applied on a gross or net basis. The answer does not appear to be settled.
Wealth Defender Equities Limited (ASX:WDE) ($103.5m market cap) and Century Australia Investments Limited (ASX:CYA) ($89.6m market cap) are examples of LICs that have been forced to release corrective dividend announcements following the change to the corporate tax rate. Both entities announced that their turnover did not meet the $10m threshold and, as such, dividend statements sent out during the 2016-17 fiscal year were incorrect.
Where a LIC has sent out an incorrect dividend statement or made an announcement to the market which has become incorrect, a correction should be published immediately.
The ASX Appendix 3A.1 is the appropriate form to announce a change to a dividend previously declared. The form is now available online through the Market Announcement Platform. An announcement on letterhead, as used by WDE and CYA, is also appropriate to provide additional information to shareholders regarding the change and its impact.
LICs should also complete a mail out to affected shareholders providing context to the updated dividend statements that will need to be sent.
LICs need to consider the impact of the change to the corporate tax rate on their monthly NTA reporting. As the threshold for the 2017-18 financial year is $25m in turnover, more LICs will be impacted and subject to a reduced tax rate.
LICs that believe that they will be below or near the FY18 turnover threshold should disclose in their NTA announcement and estimates the corporate tax rate on which their post-tax figures are based (27.5% or 30%) to provide certainty in the market.
Future Franking Credits
It is prudent for LICs to seek professional advice before the 30 September BAS returns are due to ensure that appropriate franking credits are available for dividends in the 2017-18 fiscal year. The issue of appropriate franking credits should also be considered at the next available Audit Committees for LICs in order to agree on an approach for the 2017-18 fiscal year.
This update is prepared by the Company Secretarial Team at Boardroom Pty Limited. The update is designed to provide general information and is not designed to replace legal or tax advice or a detailed review of the subject matter nor is it intended to cover all circumstances.