Dividends, Reinvestment Dividends, Reinvestment and Bonus Shares: The and Bonus Shares: The Shareholders’ ChoiceShareholders’ Choice

James MurrayJames Murray

Michael SkullyMichael Skully

Monash University, AustraliaMonash University, Australia

Dividends Under ImputationDividends Under Imputation

Shareholders receive credit for Australian Shareholders receive credit for Australian company tax already paidcompany tax already paid

Surplus credits can be used to offset other Surplus credits can be used to offset other tax liabilitiestax liabilities

Creates strong tax incentive to pay Creates strong tax incentive to pay dividendsdividends Company tax currently 30%Company tax currently 30% Superannuation (pension) funds taxed at 15% Superannuation (pension) funds taxed at 15%

want franked dividendswant franked dividends

CashCash

Franking (Tax) CreditsFranking (Tax) Credits PP profitprofit P P (1-t(1-tcc)) cash cash

PtPtc c taxtax PtPtc c credits credits

P P (1-t(1-tcc) net profit P income) net profit P income

PtPtp p taxtax

No Cash! P(1-tNo Cash! P(1-tp p ) net income) net income

TAX

CompanyProfits

ShareholderIncome

Dividend Payments and TaxDividend Payments and Tax

New SharesNew Shares

Franking (Tax) CreditsFranking (Tax) CreditsP P (1-t(1-tcc) net profit P (1-t) net profit P (1-tp p ) net income) net income

Cash to fund growth P Cash to fund growth P (1-t(1-tcc)) worth of worth of

new sharesnew shares

TAX

CompanyProfits

ShareholderIncome

Dividends With ReinvestmentDividends With Reinvestment

DRPs and BSPsDRPs and BSPs

DRPDRP Shareholders given Shareholders given

choice to exchange choice to exchange cash for sharescash for shares

Taxed as if dividend Taxed as if dividend paid then money paid then money investedinvested

BSPBSP Shareholders given Shareholders given

choice to exchange a choice to exchange a dividend for a bonus dividend for a bonus issueissue

May be taxed as May be taxed as capital or income capital or income distributiondistribution

Bonus Share PlansBonus Share Plans

Pre July 1998Pre July 1998 Capital distribution when Capital distribution when

paid from share premium paid from share premium accountaccount

Called ‘tax free’ but really Called ‘tax free’ but really tax deferredtax deferred

No income tax but capital No income tax but capital gains when shares soldgains when shares sold

Post July 1998Post July 1998 Capital distribution when Capital distribution when

paid from share capital paid from share capital accountaccount

Must be an alternative to Must be an alternative to a franked dividenda franked dividend

Extra anti-streaming laws Extra anti-streaming laws applyapply

From July 1990: Anti Dividend Streaming LawsWhen BSP is connected to a franked dividend, company must

remove franking credits from balance as if dividend paid

Possible ClientelesPossible Clienteles

Low income tax:Low income tax: Want franking creditsWant franking credits

• Cash or DRP on franked dividendsCash or DRP on franked dividends• BSP possible on unfranked dividendsBSP possible on unfranked dividends

No capital gains taxNo capital gains tax Depends on income tax and company taxDepends on income tax and company tax

• BSP on unfranked dividendsBSP on unfranked dividends• BSP when tp > tc on fully franked dividendsBSP when tp > tc on fully franked dividends

The ModelThe Model

Participation Ratio Participation Ratio = = Dollar Value Of Dividends ReinvestedDollar Value Of Dividends Reinvested

Cash Dividend With No ReinvestmentCash Dividend With No Reinvestment

= = Number Of Shares Issued x Issue Price Per ShareNumber Of Shares Issued x Issue Price Per Share

Number Of Shares x Dividend Per ShareNumber Of Shares x Dividend Per Share

Relative Participation = BSP Participation / Total DRP & BSP ParticipationRelative Participation = BSP Participation / Total DRP & BSP Participation

ββi = independent variables representing plan design features, financial and i = independent variables representing plan design features, financial and ownership factorsownership factors

n

iiR

1

ResultsResults

Dependent VariablesDependent VariablesMinMin MaxMax MedianMedian

Total ParticipationTotal Participation 1.7%1.7% 96.5%96.5% 53.3%53.3%

DRP ParticipationDRP Participation 0.3%0.3% 94.3%94.3% 39.4%39.4%

BSP ParticipationBSP Participation 0.1%0.1% 84.9%84.9% 7.5% 7.5%

Relative BSP ParticipationRelative BSP Participation 0.4%0.4% 99.6%99.6% 18.7%18.7%

Independent VariablesIndependent Variables

Discount Offered on Discount Offered on New SharesNew Shares

FrankingFranking Number ShareholdersNumber Shareholders Top 20 ShareholdersTop 20 Shareholders

Payout RatioPayout Ratio PE RatioPE Ratio Market to BookMarket to Book Debt to EquityDebt to Equity Market Return on Market Return on

SharesShares

Total Reinvestment RatesTotal Reinvestment Rates

DRP Reinvestment RatesDRP Reinvestment Rates

BSP Reinvestment RatesBSP Reinvestment Rates

Relative BSP ReinvestmentRelative BSP Reinvestment

BSP Post Streaming (1990)BSP Post Streaming (1990)

Relative BSP Post StreamingRelative BSP Post Streaming

ThankyouThankyou