The impact of Australia's income tax system on company ownership structure

This study examines the links between investor residency, tax status and the corporate ownership structure of Australian listed companies. We find that there is a preference by resident individuals, corporate companies and superannuation funds to hold a significantly higher proportion of shares in companies that pay fully franked dividends, relative to other companies. Furthermore, our results show that non-resident investors, in general, hold a significantly higher proportion of shares in companies that pay either unfranked or partially franked dividends, relative to other companies. Finally, there is some evidence that resident individual investors hold a significantly higher proportion of shares in capital appreciating, as opposed to dividend paying, companies, which is consistent with resident individuals seeking to utilise the tax concessions they are afforded on long-term capital gains. Overall, these findings are consistent with the notion that the tax system in Australia, whereby capital gains tax and dividend imputation operate in unison, may contribute to the creation of clienteles of investors that are attracted to companies on the basis of their payout policy. This has important implications at both the company-level, with respect to companies that are considering the impact of a change in payout policy on the composition of their share registry, as well as at the national-level in terms of the potential impact of changes in the taxation system on the willingness of non-resident investors to invest directly in the Australian stock market.