Business News

There's nothing unfair about dividend imputation -- it refunds tax that shouldn't have been paid

  • Written by Steven Hamilton, Visiting Scholar, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

As election day approaches, dividend imputation is back in the news and the hot takes are running hot. Commentators are branding the system we’ve got a “tax dodge”, a “handout” and a “loophole”, and praising Labor’s proposal as economically sound.

But they’re wrong.

Australia, almost uniquely in the world, has for decades taxed profits in a special way. These profits are, in one way or another, owed to shareholders. In a normal tax system, profits are first taxed at the company level when they’re earned and then taxed at the personal level when they’re paid as dividends.

Dividend imputation eliminates the first stage.

For shares owned by Australians, the idea is to extinguish all taxes the company owes. To that end, Australian shareholders get a refund of the taxes paid by the company, known as “franking credits”. Labor says it has no beef with this idea. It set up Australia’s dividend imputation system in 1987.

Labor introduced dividend imputation

So what does it want to do now?

At the moment, Australian shareholders get back the taxes paid by the company no matter what. If they have a tax bill, then it’s reduced by the relevant amount; if they don’t have a tax bill, then they get a cheque in the mail instead.

John Howard reformed Labor’s system in the year 2000 on the recommendation of the Ralph Review of Business Taxation. Non-taxpayers as well as taxpayers would be eligible for refunds of company tax.

Labor wants to revert back to how things originally were. It wants to take away franking credits from anyone who, for any reason, doesn’t have a personal tax bill, whether rich or poor, young or old, in work or retired.

Many shareholders legitimately pay no tax

Reasons abound as to why you might own shares but pay no tax. And they need not have anything to do with being a tax dodger, a taker of handouts, or an exploiter of loopholes.

Imagine you own some Telstra shares, but take a year off to look after your children. When you work, the tax Telstra paid is refunded to you so no corporate tax is paid on those shares. But under Labor’s proposal when you take a year off, you would no longer be entitled to that refund. Telstra would only pay tax on your shares when you looked after your children.

To me, that’s nuts.

And if you think only the wealthy own shares, think again. There are thousands of Australians for whom those Telstra dividends pay the power bill.

So why is Labor proposing it?

Labor wants their money

In part because it wants the money – an estimated A$5 billion per year.

It’s hard to think of another reason. Getting a $100 cheque in the mail is equivalent to getting an extra $100 in your tax return.

Labor says it’s wrong to give tax refunds to people who don’t pay tax. But another way of looking at it is that they have paid tax – it’s just that the companies they own did it for them.

If you don’t like those without tax bills getting refunds then you ought to ask why it’s happening.

If you don’t like the answer – which might be that tax-free super is their only other source of income – you should look at fixing the root cause. But then you should leave the imputation system, which works as intended, alone.

And it’s prepared to abandon good tax design

The core principle of tax design is neutrality —- ensuring that taxes depend on behaviour as little as possible. The current system is neutral because shareholders get company tax back regardless of their tax status; Labor’s proposal would return company tax to some shareowners and not others.

The best way to target the rich is to design an income tax system that does it directly.

Reverting to the old, hobbled version of dividend imputation isn’t reform – it’s the opposite.

Read more: Words that matter. What’s a franking credit? What’s dividend imputation? And what's 'retiree tax'?[1]

The only thing Labor’s proposal has going for it is the revenue it will raise. But that’s a low bar. The best policy isn’t the one that raises the most revenue, its the one that raises revenue at the lowest economic cost.

There are lots of ways to raise revenue. Many of them are coherent, principled, targeted, transparent, fair, and don’t distort economic activity. Work-related deductions, superannuation tax concessions, and the design of the income tax itself are better places to look.

Read more: It's hard to find out who Labor's dividend imputation policy will hit, but it is possible, and it isn't the poor[2]

Authors: Steven Hamilton, Visiting Scholar, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

Read more http://theconversation.com/theres-nothing-unfair-about-dividend-imputation-it-refunds-tax-that-shouldnt-have-been-paid-116604

Business Daily Media Business Development

Bahrain Property Show 2018: How does it reflect the real estate market development in Bahrain

It is no secret that the Arabian Peninsula and the Gulf Cooperation Council (GCC) countries are currently going through a lot of pivotal changes. Such changes do not include economic or po...

News Company - avatar News Company

Di Jones real estate recognises high achievers

Di Jones celebrated its outstanding performers on Saturday (24 February 2018) evening at the Di Jones Real Estate Annual Awards.                               The black-tie Gala Dinner s...

Helen Hull - avatar Helen Hull

Five Reasons Melbourne Rules

If you are traveling in Australia and have left Melbourne off your destination list, then you are going to want to reconsider. Many people consider Melbourne to the best city in the world...

News Feature Team - avatar News Feature Team

Making Friends During Your Campsite Stay

Part of the excitement of vacation is meeting people who you would never otherwise encounter. Staying at a campsite isn’t just about taking in nature. It’s also about sharing the beauty of n...

News Feature Team - avatar News Feature Team

Have More Fun On Your Business Trips

Whether you are a traveling salesman or someone who finds themselves on the road more than in their office you probably are grateful for any tips you can get especially if they involve havin...

News Feature Team - avatar News Feature Team

Traditions of Rural Bali at Villa Sabana

A Privileged Insight into the Traditions of Rural Bali at Villa Sabana  Situated in the traditional village of Pererenan near Canggu, Villa Sabana is peacefully secluded in a semi-rural...

Linda Lim - avatar Linda Lim

Business Daily Media Business Reports

Di Jones real estate recognises high achievers

Di Jones celebrated its outstanding performers on Saturday (24 February 2018) evening at the Di Jones Real Estate Annual Awards.                               The bla...

Helen Hull - avatar Helen Hull

Eclipse Travel Expands Operations to New Zealand

Eclipse Travel, specialists in key adventure destinations such as Antarctica, the Arctic, Africa and Latin America, have announced today their expansion of operations to ...

Yvonne Kong - avatar Yvonne Kong

How medical professionals can benefit from an overall wealth management solution

As a health care professional, you have made it your life's work to focus on the care and health of the general public. While this kind of work can be extremely rewarding...

News Feature Team - avatar News Feature Team

Why Pinterest Should Be Part of Your Marketing Strategy

Pinterest is a growing social media platform that can deliver significant traffic to your website and new followers to your brand. With it’s steady growth and outrageous ...

Greg Nunan - avatar Greg Nunan

The top reasons why gyms fail

Steve Grant is a Business Coach and Founder of GymHub.com.au   Every month thousands of new trainers walk out of their 6-month course with the qualifications needed ...

Steve Grant - avatar Steve Grant

WHITE LABEL NOBA’s Winter 2016 season: Earth + Country

Taking cues from the warm winter colours of tobacco and caramel, and combining them with the strength of navy and the embracing lightness of whites and creams; and then...

Kath Rose - avatar Kath Rose

Former Etihad boss brings substantial event insight to PMY Group Board

Paul Sergeant PMY Group, the architects of the digital insurgency occurring at major venues across Australia and New Zealand, are delighted to welcome 35 year even...

Annie Konieczny - avatar Annie Konieczny

More training for coffee making than property sales: REINSW

Sydney 9 May 2016. An overhaul of education and training standards for the real estate profession must take place to help prevent illegal activities, according to the Rea...

Helen Hull - avatar Helen Hull