The Business lobby is calling on the Turnbull Government to end dividend imputation, with the savings generated to be used to slash the corporate tax rate. From The AFR:
Australian Industry Group chief executive officer Innes Willox has thrown forward the idea…
“A key part of our addiction to income tax is that the combination of our relatively high company tax rate and our relatively broad corporate tax base places Australia among the most heavily reliant on company tax across the OECD.”
He suggests an alternative to “using GST revenue to fund a much-needed company tax cut, is financing a substantial cut by removing our imputation system”.
“This alternative now warrants more serious attention,” he says.
…the move, worth about $19 billion a year, could fund a cut to the company tax rate from 30 per cent to 20 per cent…
The company tax cut would also generate favourable employment and productivity gains from greater inbound investment.
The idea certainly has merit.
As argued by Paul Docherty, Senior Lecturer as the Newcastle Business School, Australian firms continue to have high dividend payout ratios by international standards, and these have grown consistently faster than earning over the past five years.
The average firm around the world currently returns only 44% of profits to shareholders, whereas Australian firms return 73% (see next chart).
This high payout ratio in Australia arguably comes at the cost of economic growth via less business investment. That is, the increased demand for dividends within an imputation tax system restricts firms’ access to their preferred source of financing: retained earnings.
Another issue with Australia’s dividend imputation system is that it is costing the Budget dearly thanks to the fateful decision in 2000 by former Treasurer, Peter Costello, which allowed the conversion of franking credits into cash refunds for shareholders. This enabled tax-free (mostly wealthy) superannuation holders over the age of 60 to claim imputation credits even though they pay no tax. The Australia Institute explains:
When companies pay dividends to Australia shareholders out of after-tax profit, shareholders also receive ‘franking credits’ which are a credit against their own tax obligation and based on the tax paid by the company. This system, known as ‘dividend imputation’ is unusual and only 4 other countries in the world use it.
However, in 2000 Mr Costello made the system even more generous to shareholders by allowing them to get a cash refund if they receive more in ‘franking credits’ than they actually owe in tax. Because income from superannuation is tax free for people over 60, high income retirees can use franking credits to get a cash gift of over 40 cents for every dollar they receive in dividends.
The ATO estimates that Peter Costello’s decision to allow ‘excess’ franking credits to be refunded as cash cost $4.6 billion in 2012-13.
At a minimum, Peter Costello’s changes in 2000 should be unwound so that investors should only be allowed to offset franking credits against tax that they have paid.
If the goal of dividend imputation is purely to avoid double taxation, then it makes absolutely no sense to allow retirees paying zero tax on their superannuation earnings to then also receive cash refunds for their franking credits. Such a situation is not only inequitable and effectively a subsidy to the (mostly) rich, but the cost to the Budget is simply too high to be ignored.
