With the Senate cross-bench opposed to providing large businesses with company tax cuts, the debate has shifted to whether tax cuts will be extended to small businesses with turnovers of $10 million or medium-sized businesses with turnovers of $50 million. From The AFR:
Senator Xenophon is thus far only prepared to support the first phase of the 10-year plan – cutting the corporate tax rate to 27.5 per cent for firms with turnovers up up to $10 million – and says he will not move further until real action is taken to curb the energy supply and price crisis hurting business and households.
Pauline Hanson’s One Nation, which has four senators, is understood to support a tax rate of 27.5 per cent for those with turnovers up to $50 million…
Jacqui Lambie, like Labor and the Greens, opposes the entire package, Liberal Democratic Party Senator David Leyonhjelm supports the entire package while Derryn Hinch is with Senator Xenophon at the moment by supporting only tax relief for those with a $10 million turnover.
Whether company tax cuts are extended to $10 million turnover businesses or $50 million turnover businesses is rather academic, because it won’t actually provide them with much tax relief nor cost the Budget much. This is because the overwhelming majority of smaller businesses are wholly Australian owned and because of this, they are subject to Australia’s dividend imputation system. Effectively, any cuts to the company tax rate will be largely offset by commensurate cuts to franking credits. Thus, smaller businesses should be largely indifferent to company tax cuts.
As noted by Fairfax’s Ross Gittins yesterday, all the hoopla over company taxes is beginning to look like ‘fake news’:
…the cut will be of little benefit to the businesses receiving it, little net cost to the budget and little benefit to “jobs and growth”.
Australia’s problem isn’t fake news, it’s fake government…
Paul Keating introduced full dividend imputation in 1987 to eliminate the double taxation of company dividends. Domestic shareholders are given “franking [tax] credits” worth 30¢ in the dollar on those dividends that have already been taxed at 30 per cent in the company’s hands.
Dividends are taxed at the shareholder’s marginal tax rate, but less their franking credits. Should they not owe enough tax to extinguish the credit, the balance is refunded to them.
The effect of this for Australian shareholders and super funds is to render company tax little more than a withholding tax, like the income tax businesses withhold from their workers’ pay packets…
Since the franking credit rate moves up or down with the rate of company tax, Australian shareholders have little or nothing to gain from a cut in the company tax rate. Only foreign shareholders – present or prospective – would benefit.
That’s right. The only parties that would benefit from company tax cuts are large foreign-owned corporations that are not subject to Australia’s dividend imputation system. For these foreign-owned business there would be no offset in the form of lower franking credits, therefore, a company tax cut would represent a financial windfall from Australian tax payers.
However, since the threshold is likely to be capped at $10 million or $50 million in turnover, and most of the businesses operating in this space are Australian-owned, there is little to fear (but also little to gain) from cutting company taxes.
The whole issue has become a smokescreen to give the impression to voters that the Government is acting to boost “jobs and growth”, when really it is doing nothing much at all. And that’s Do-Nothing Turnbull to a tee.
