A report on dividend imputation released by ASFA yesterday claimed the abolition of either dividend imputation or the current system of refundable franking credits would have the greatest impact on retirees, superannuation fund members and low- to middle-income earners who would lose the current refund benefits on their zero or low tax rates.
ASFA chief executive Pauline Vamos said while removing or changing dividend imputation might seem like a quick revenue fix for the government now, it will have negative long-term effects on Australians’ retirement savings.
“Initiatives like franking credits help to incentivise Australians to put money away for retirement as early and as often as possible,” said Ms Vamos.
“If we remove this benefit, it will have the most negative impact on retirees and low- to middle-income Australians who will see the tax rates on their superannuation earnings raised from 0 and 15 per cent respectively to 30 per cent across the board.”
Ms Vamos said that currently, dividend imputation over both the accumulation and retirement stages leads to an increase in retirement income streams of around 13 per cent.
“For a worker on an average income this equates to $4,000 more in retirement per annum,” she said.
“Even with the benefit of dividend imputation, only 35 per cent of Australians are retiring with enough superannuation to live a comfortable lifestyle – we clearly need to be helping Australians to bolster these savings instead.”
A decrease in retirement income streams Ms Vamos highlighted would also have a long-term negative effect for Australian taxpayers, who would bear around half the cost through increased public pension entitlement.
The report also indicated that a complete removal of dividend imputation might lessen the attractiveness of domestic equities and therefore a reduction in investment.
ASFA said a return to double-taxation of company income could also create an investor bias in favour of debt financing, rather than equity investment.
“It is imperative that we take a long-term view when considering tax reform and adequately cater for our growing retiree population,” said Ms Vamos.
Responding to the devil’s advocate –
If it be argued that super pensions should be taxed, then tax them, but still refund imputation credits, otherwise you will be taxing them at a flat 30% with no tax-free threshold. Plus there is the obvious question of having to refund all the taxes previously paid at 15% on earnings and contributions in accumulation mode. Given the size and duration of most super pensions, there would be little tax collected and many would be claiming refunds on the 15% tax paid on nearly 20 or 30 years of accumulation mode.
It is a pity Treasury was so greedy in 1988. if they had allowed unlimited deductibility and no taxation in accumulation mode, they could now be requiring taxable pensions and income testing people dollar for dollar out of the age pension. The latter they could still logically do.
Playing the devils advocate for a minute.
Shareholders own the company. The company pays tax and distributes profits to its owners – the shareholders. Imputation means that these profits are not double taxed.
However, if the shareholder is in a “tax free” position and entitled to a full refund of all the franking credits then this means that there has been no net tax paid on the company’s profits.
No-one would suggest that all companies in Australia pay zero % tax and can give out their profits tax free to their owners. So why should Superfunds in pension mode get tax free company profits when everyone else pays tax?
Sir Robert Garran’s 1915 Act did follow the deduction route for dividends. A problem with that solution is there can still be double taxation if taxed retained profits are later distributed eg when the company is in a loss position or being wound up. Of course that can be planned around with a full distribution policy combined with re-investment plans, like property trusts, but it does bias companies away from financial prudence, especially where accounting rules are more conservative than tax rules. Variations to solve the problem such as carry back of dividend deductions to trigger refunds are similar to franking credits being used up later.
The current political push is being driven by some multinationals who don’t like shareholders being able to decide what to do with their money. They would like to have a reason to refuse to pay out dividends rather than justify investment projects. Foreign multinationals want a tax cut and, if Aussies pay for it, great!
[quote name=”Dr Terry Dwyer, Dwyer Lawyers”]A rebate was the pre WW II “solution” but it still resulted in over-taxation. A flat rebate either over-taxes or under-taxes. Imputation is the correct solution unless you go to the pure partnership model and tax people on their aliquot share of undistributed profits. In effect the 30% company tax rate is a backup withholding tax pending distribution of profits.[/quote]
Or do something really different like treat dividends like interest on debt – the only difference being that both the quantum and timing of payment is at the discretion of the company. But otherwise deductible before company tax and taxable in the hands of the investor.
A rebate was the pre WW II “solution” but it still resulted in over-taxation. A flat rebate either over-taxes or under-taxes. Imputation is the correct solution unless you go to the pure partnership model and tax people on their aliquot share of undistributed profits. In effect the 30% company tax rate is a backup withholding tax pending distribution of profits.
But why not simplify it by, for example, just allowing a rebate to Australian resident tax payers for dividends received from Australian companies?
A long term view is beyond our political masters. Ending the “age of entitlement ‘for the politians would save halve a billion $ PA. What is the revenue saving after cost of policing the ending of imputation credits for SMSF and consequent reduction in SMSF retirement balances????
Good to see ASFA finally wake up to bureaucratic plotting and talk some sense for once. The removal of the double taxation of dividends was Mr Keating’s great achievement as Treasurer. To re-introduce it would be a massive economic distortion and only lead to more foreign ownership of Australia. What needs to be done is to complete it by allowing the foreign tax credit to count as a payment of tax which is imputable to shareholders so that the underlying partnership model is carried through.