Most sharemarket analysts believe the majority of companies will continue to pay dividends but the payments won't increase from year to year at quite the same rate as before. The sea change reflects changes to tax laws which can make capital returns such as buybacks far more tax-effective than dividends. Mindful of this, companies such as Goodman Fielder and Lend Lease have already warned their shareholders that buybacks may replace dividends as their capital management tool of choice. In the US shareholders are well attuned to receiving their returns via capital growth, which they realise by accepting share buybacks. We are seeing it already with buyback activity picking up.
Companies are aware they have to change their polices.
Changes to capital gains tax rules last year and a lower corporate tax rate from June 30 have combined to encourage companies to reassess how they reward shareholders. The new CGT regime has the greatest impact on companies that pay unfranked or partially franked dividends. These tend to be companies that source a large portion of their earnings from offshore and aren't able to claim Australian tax credits on international profits. After the Federal Government's decision to halve the capital gains tax rate, individual shareholders are liable for a maximum tax rate of 24.25 per cent on gains made from the sale of shares held for more than one year. On the other hand, a shareholder on the highest marginal rate is taxed up to 48.5 per cent on unfranked dividends.