Dividends, Reinvestment and Bonus Shares: The Shareholders’ Choice James Murray Michael Skully Monash University, Australia

Dividends Under Imputation  Shareholders receive credit for Australian company tax already paid  Surplus credits can be used to offset other tax liabilities  Creates strong tax incentive to pay dividends Company tax currently 30% Company tax currently 30% Superannuation (pension) funds taxed at 15% want franked dividends Superannuation (pension) funds taxed at 15% want franked dividends

Cash Franking (Tax) Credits Franking (Tax) Credits P profit P (1-t c ) cash P profit P (1-t c ) cash Pt c tax Pt c credits Pt c tax Pt c credits P (1-t c ) net profit P income P (1-t c ) net profit P income Pt p tax Pt p tax No Cash! P(1-t p ) net income No Cash! P(1-t p ) net income TAX Company Profits Shareholder Income Dividend Payments and Tax

New Shares New Shares Franking (Tax) Credits Franking (Tax) Credits P (1-t c ) net profit P (1-t p ) net income Cash to fund growth P (1-t c ) worth of new shares new shares TAX Company Profits Shareholder Income Dividends With Reinvestment

DRPs and BSPs  DRP  Shareholders given choice to exchange cash for shares  Taxed as if dividend paid then money invested  BSP  Shareholders given choice to exchange a dividend for a bonus issue  May be taxed as capital or income distribution

Bonus Share Plans Pre July 1998  Capital distribution when paid from share premium account  Called ‘tax free’ but really tax deferred  No income tax but capital gains when shares sold Post July 1998  Capital distribution when paid from share capital account  Must be an alternative to a franked dividend  Extra anti-streaming laws apply From July 1990: Anti Dividend Streaming Laws When BSP is connected to a franked dividend, company must remove franking credits from balance as if dividend paid

Possible Clienteles  Low income tax: Want franking credits Want 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 tax Depends on income tax and company tax Depends 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 Model Participation Ratio = Dollar Value Of Dividends Reinvested Cash Dividend With No Reinvestment = Number Of Shares Issued x Issue Price Per Share Number Of Shares x Dividend Per Share Relative Participation = BSP Participation / Total DRP & BSP Participation βi = independent variables representing plan design features, financial and ownership factors

Results Dependent Variables MinMaxMedian Total Participation1.7%96.5%53.3% DRP Participation0.3%94.3%39.4% BSP Participation0.1%84.9% 7.5% Relative BSP Participation0.4%99.6%18.7%

Independent Variables  Discount Offered on New Shares  Franking  Number Shareholders  Top 20 Shareholders  Payout Ratio  PE Ratio  Market to Book  Debt to Equity  Market Return on Shares

Total Reinvestment Rates

DRP Reinvestment Rates

BSP Reinvestment Rates

Relative BSP Reinvestment

BSP Post Streaming (1990)

Relative BSP Post Streaming

 Thankyou