Unless the addiction to dividends can be kicked, Australia is likely to suffer a chronic shortage of capital investment and the corporate sector will not grow to the extent it should, writes Alan Kohler.

It's hard to imagine anything more bittersweet for a nation than franked dividends.

They are pouring more than $50 billion a year of beautiful, largely tax-free income into the hands of the deserving well-off and helping them lead comfortable retirements without relying on the government pension.

In fact, according to tax office statistics, the ATO is actually sending out billions in cash franking credit refunds to super funds in pension phase: in 2011 it was $2.5 billion, but it would be much more now.

Apart from the fact that it costs the Treasury a fortune, the nation's investors have become obsessed with harvesting dividends and the companies with supplying them.

The share market has become a giant retiree ATM instead of a means of supplying capital for business investment. All of the return from the market since the beginning of 2007 - 35.1 per cent - has come from dividends.

Another way of expressing that is that there has been zero capital growth, only cash payouts, while over the same period the US share market has grown 40 per cent.

A direct result of this is that since 2007 non-mining business investment in Australia has fallen from 14 to 10.5 per cent of GDP, the lowest level since the 1991 recession. Companies are not reinvesting in their businesses.

Unless the addiction to dividends can be kicked, Australia is likely to suffer a chronic shortage of capital investment and the corporate sector will not grow to the extent it should.

Venture capital and infrastructure are hopelessly under-invested and despite constant searches for the answer to moving more of the nation's vast superannuation pool into them, nothing much happens. Instead, dividend payout ratios go up.



Realistically, dividend franking will not be abolished - it is here to stay, despite the unintended consequences. But whether zero tax on super funds in pension phase can be here to stay is another matter: there are increasingly persistent calls for the Government to start taxing them at 15 per cent.

Alternatively the Government could entirely rethink the way companies and individuals are taxed with the aim of encouraging entrepreneurialism and business investment. At the moment the tax system merely encourages the payment of dividends - God help a company that sits on franking credits - and if dividend franking were abolished companies would probably be inclined simply to hoard cash.

Meanwhile the Government is looking for an idea, something positive that it could call a vision for the country.

Stop the boats, axe the tax, cut the waste, slash the red tape and slow down the broadband were all excellent wheezes in opposition, but such things only take you so far in government. The Abbott Government still appears to be mostly against things, and can't even be effective at that because of Clive Palmer, who bought the Senate.

The nation is mired in unresolvable arguments about welfare and distribution between people who are not listening.

How about this for a positive idea: Australia can be entrepreneurial. The only way any economy grows is if the returns from corporate investment are greater than those from being passive. The system needs to favour entrepreneurs over landlords, risk-takers over rent-collectors.

Part of the answer lies in increasing consumption taxes, so that those with super funds in pension phase at least pay more tax when they consume, along with everyone else paying income taxes, but the corporate tax system also needs to tilt towards investment, not away from it as it does now.

Alan Kohler is finance presenter on ABC News. He tweets at @alankohler. View his full profile here.