SMSF Owners’ Alliance executive director Duncan Fairweather said that while Australia’s corporate tax rate should be low to make it more competitive with other countries, dropping imputation would immediately drop the value of Australian companies to shareholders by 20 per cent.
“A shareholder on a marginal rate of 37 per cent would get a 20 per cent lower return, therefore reducing the value of the company’s shares to investors by 20 per cent,” said Mr Fairweather.
“Imputation is not a tax concession. It is a credit to shareholders for tax on company profits that has already been paid.”
Mr Fairweather said that without imputation, returns on investment would be double taxed, first via the corporate tax on profits and then on dividends issued to shareholders.
“This credit is only available to Australian taxpayers. So removing imputation would disadvantage Australians who invest in Australian companies and the lower tax rate gives an advantage to foreign investors,” he said.
The removal of imputation, he said, would also distort the balance between equity and debt in corporate capital raising.
“Imputation puts equity on the same effective tax basis as debt. Without full imputation, debt finance will be relatively cheaper, inevitably leading to greater use of debt funding and an increase in corporate gearing with consequent increase in risk,” he said.
“Removing or reducing the imputation credit would distort and devastate the Australian equity market. The impact on an already depressed and nervous market would be catastrophic.”
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[quote name=”Dr Terry Dwyer, Dwyer Lawyers”]… If you do not want superfund earnings to be zero-taxed in pension mode, apply the 15% tax to them, rather than the implied 30% company tax rate by denying imputation (which would push money into public trust structures). But please do be aware that, even with a 15% tax rate, you have just reduced incentives to Australian capital formation and made offshore superannuation more attractive, since offshore entities do not pay any tax on share portfolio capital gains. And, yes, the optimal rate of tax on capital income is indeed zero (remembering that land income is not capital income).[/quote]
But if people invest in foreign superannuation then any pension payments they receive are fully taxable in their hands at marginal rates (minus a few offsets).
IMO a better system retains share imputation and tax free pensions but keeps 15% taxation of the funds profits regardless of the pension / accumulation status.
With respect, imputation is perfectly correct – it imputes to the shareholder his share of company income and the tax thereon as a credit. If you do not want superfund earnings to be zero-taxed in pension mode, apply the 15% tax to them, rather than the implied 30% company tax rate by denying imputation (which would push money into public trust structures). But please do be aware that, even with a 15% tax rate, you have just reduced incentives to Australian capital formation and made offshore superannuation more attractive, since offshore entities do not pay any tax on share portfolio capital gains. And, yes, the optimal rate of tax on capital income is indeed zero (remembering that land income is not capital income).
The only circumstance where I would be in favour of dropping imputation is where the company tax rate was dropped to zero!! Essentially the same thing in reverse and perhaps better in that making Australia an astonishingly attractive place to invest and create jobs. But we wouldn’t want to design a tax system around creating jobs and wealth when we can go on and on about so called “fairness”.
@Ralph, I have long had the view that imputation credits should be non-refundable – they would still stop double taxation of corporate profits, but when there is no tax payable by the ultimate recipient of the income, why should the company tax be refunded? It makes no sense.
The “double taxation” argument gets trotted out again but the reality is that imputation means that company owners who happen to be super funds in pension mode pay no tax on company profits.
Everyone is up in arms about foreign companies who pay little or no next tax, yet are happy for super funds, which control tens of billons of dollars of assets and make hundreds of millons of profit, to pay zero tax.
My “quite so” was in agreement with SMSFOA.
It is not correct to say they are wrong because company tax pays for infrastructure.
1. Most infrastructure is now (wrongly) paid for by users eg Pilbara users, toll roads. Airports, gas, water, electricity are all either corporatized or privatized and used to collect public or private taxes or quasi-taxes from users to pay dividends to rapacious Treasuries or public shareholders. That’s why manufacturing is exiting.
2, Ratepayers used to pay for a lot of infrastructure (as they should) while road taxes exceed expenditure on roads.
3. It is the landholders who are being subsidized by infrastructure adding to the value of lands serviced.
So taxpayers do not provide infrastructure and the free riders are landholders not companies as such. This all has nothing to do with imputation’s merits.
Quite so.
SMSFOA has an obvious vested interest in this. But should not advance spurious arguments in support of that interest.
One of the biggest users of the infrastructure for business provided by the taxpayers is the private sector. Company tax pays for that infrastructure. If we give company tax back to shareholders as imputation credits we are not just giving the money that is needed to maintain the infrastructure but we are charging non-shareholder tax payers for the cost of infrastructure used by the private sector without charge.