Hi Gary,
Franking credits are accrued becuase the tax has already been paid by the company, so technically, the Govt is just passing through the credit already paid by the company. Arguably, the benefit of having franking on the balance sheet has somewhat reduced after Gerry Harvey worked the system, and raised equity in HVN only to pass it back to shareholders in a fully franked special divdend. This gaming of the system prompted the ATO to abolish this stratetgy.
However , franking credits afford a company flexibility in a couple of ways to benefit shareholder:
- Pay special dividends (to release franking credits).
- Undertake off-market buybacks with franking components.
- It can also make them more attractive to an acquirer, or, make themselves more attractive to a target company who can benefit from the franking credits.
Franking credits don’t generate cash flow—they’re a tax asset, not liquid capital. In other words they give company XYZ “strategic flexibility” to return capital to shareholders in a tax-effective way. This can support the share price.
