In the year leading-up to the Turnbull Government announcing its company tax cut, I frequently argued that it would have minimal impact on Australian business owners and shareholders because of Australia’s dividend imputation system. For example:
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.
…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.
Today, reality has dawned, via The AFR:
Institutional investors and superannuation funds face franking credit losses of “epic proportions” unless the government deals with the adverse effect of the interplay between a lower corporate tax rate and dividend imputation, experts warn.
The problem arises because under the Enterprise Tax Plan, tax is payable on a company’s current-year turnover, whereas franking is based on the past year’s turnover.
That means tax is paid at 30 per cent but credits can only be franked at 27.5 per cent, leaving a 2.5 percentage point credit that either gets trapped in the company or is pocketed by the government, which needs to find $25 billion to pay for the first phase of its plan.
While the mismatch only affects smaller companies at the moment, if the government manages to get its full plan through the Senate, shareholders in the nation’s biggest companies will be short-changed…That includes self-funded retirees on tax-free pensions, who will ultimately get smaller cash refunds.
BDO tax partner Tony Sloan said the government was punishing the mum-and-dad shareholders it wanted to help and “poisoning” former Labor treasurer Paul Keating’s dividend imputation system.
“The government’s recent tax cut and franking changes are wreaking havoc with those small Australian businesses which are supposed to be benefiting from the tax cut from 30 per cent to 27.5 per cent,” he said.
The 27.5 per cent rate applies to businesses with aggregated turnover of less than $10 million from the 2016-17 income year.
Companies with turnover of up to $25 million are eligible for the 27.5 per cent rate in 2017-18 and those with turnover of under $50 million from 2018-19.
Slow learners.
