Maintain the current dividend imputation system

[Kremmen]

BHP pay 30% tax.
Keating set it up so the taxpayers don't pay 40% tax and top of the 30% tax (double taxation).
In 2000 Howard changed it so if you pay no tax you get the money from BHP and the government gets no money.

This is totally untrue. It should end "you get the money from BHP and the government gets to keep only the money that you owe according to your personal tax rate, just like with all other income."

 

[HelloU]

if someone gets 70c of dividend now (and another 30c goes to the ato as a credit) both ato and centrelink say that person earns $1. based upon how many of those $1's they get that person may or may not get welfare things ........

currently, if they are a zero tax (or similar) type person then they would end up with that $1 in their pocket - and again they may, or may not, end up with welfare top ups.

under the proposed system - for those that never got welfare before - that same person will only end up with 70c of that $1 in their pocket .......so the logical extension is that there will have be a fiddle to welfare eligibility requirements to take into account credits that may not get refunded into the pockets of people.

i wonder if these newly entitled welfare recipients (cos they no longer get refunds) will get 30c of new welfare as a top up for each 70c income they earn?

now that would be hilarious.

 

[basilio]

I have to say this outrage at the potential loss of dividend imputation refunds (not the actual credits..) has reached peak madness..

Once upon a time Paul Keating decided that investors shouldn't pay doble taxation on dividends that companies had already paid tax on.

So enters the dividend imputation. If you received a fully franked dividend it came attached with a tax credit which said that 30% tax had been paid. You could add this dividend to your personal income and hopefully not have to pay any/much more tax.

Later on 2001/2006 some very clever financial advisors work out a way of justifying to a Liberal government that it was a crying shame if people couldn't actually use that franking credit against their taxable income because, horror of horrors, they didn't have a taxable income They were just so, so poor..

So they convinced the Liberal Party Government to give back real cash to these poor people instead of them using the franking credits against their real actual income.

With this green light in place our very clever financial advisors created structures that enabled their very wealthy clients to not only reduce their nominal income to three fifths of FA BUT to then also get $5 Billion dollars a year of hard earned taxpayers dollars as a very rich cream on the cake of tax avoidance.

The madness now of course is this amazing series of faux justifications for what was always just a smart alec rort of a basically good idea.

 

[Smurf1976]

BUT to then also get $5 Billion dollars a year of hard earned taxpayers dollars as a very rich cream on the cake of tax avoidance.

How does paying the same rate of tax that would be paid on any other source of income constitute tax avoidance?

It’s like arguing that I’m receiving taxpayer funds because I’ve hung the washing out on the line thus avoiding payment of GST on electricity that could otherwise have been used to dry the washing.

Not paying a tax and receiving taxpayer funds are very different things. Likewise I’m not receiving money from McDonald’s simply by failing to purchase their products.

As I’ve said before, why not start by cracking down on actual tax avoidance rather than those who are simply paying the same rate as everyone else?

So called salary “packaging” would be a good place to start. A lurk that’s primarily available to current high income earners and which exists for the sole purpose of avoiding tax. It’s not the only such example and would be easily removed.

 

[Junior]

With this green light in place our very clever financial advisors created structures that enabled their very wealthy clients to not only reduce their nominal income to three fifths of FA BUT to then also get $5 Billion dollars a year of hard earned taxpayers dollars as a very rich cream on the cake of tax avoidance.

1. It is not only the wealthy who benefit from this system.

2. The refunds are not "hard-earned taxpayers dollars", this is company tax, already paid to the ATO, being refunded to that same company's shareholders.

3. High income earners cannot reduce their taxable income by owning FF shares, if you are on a high MTR you still pay additional tax on your dividends, in addition to the 30% tax already paid by the company.

4. Introduction of the Transfer Balance Cap has served to limit the size of tax refunds able to be claimed by an SMSF. As a few here have stated, simply lowering this cap, or introducing a higher earnings tax rate on super balances above the cap, would be simpler, fairer and more effective than killing refundable FCs all together.

5. Very careful consideration needs to be given to small business owners who utilise a company structure and pay themselves dividends....many of these businesses rely on the franking credit system as it currently exists.

 

[basilio]

Smurf I have little argument against cracking down on other tax avoidance activities. But this particular rort is not just a series of creative accountancy designed to reduce taxable income to a minimum. It goes a step further and takes $5B a year from the overall tax take..

Someone else on ASF (can't quite remember) made an elegant analysis of the this rort. A company pays it company tax at $30% and then passes on its fully franked divided to you as a shareholder. You as a shareholder receive the dividend and a separate franking credit representing the tax the company has paid.

If you end up getting this franking credit back as cash you are in effect getting back the company tax that as paid on the original enterprise. Voila ! The original enterprise in effect has paid no tax to the Tax Office because it's original tax payment has, in a direct line, been returned to it's shareholder.

I wonder if there arn't a number of companies which have created a structure where the company has nominally paid it's company tax but the shareholders have all managed to create financial structures with zero taxable income and therefore on receiving the dividends can just pull back the company tax in full.

Wouldn't that be clever ?

____________________________________

Perhaps my last observation is what Junior is referring to with businesses where the owners see up a company structure, pay themselves dividends and then, perhaps, get back the franking credits as a cash refund (ie their original company tax) because they end up with a minimum taxable income.

 

[Junior]

Someone else on ASF (can't quite remember) made an elegant analysis of the this rort. A company pays it company tax at $30% and then passes on its fully franked divided to you as a shareholder. You as a shareholder receive the dividend and a separate franking credit representing the tax the company has paid.

If you end up getting this franking credit back as cash you are in effect getting back the company tax that as paid on the original enterprise. Voila ! The original enterprise in effect has paid no tax to the Tax Office because it's original tax payment has, in a direct line, been returned to it's shareholder.

One of the reasons these strategies have become so popular, is that we now have one of the highest company tax rates in the world. And thanks to unwillingness of Government to address bracket creep, very high rates of income tax too.

For small to medium size businesses in particular.....paying 30% of all profits to the government, and then further tax if you wish to pay yourself a salary, plus payroll tax etc. Australia is becoming increasingly out of touch with tax rates globally, and we keep giving more free kicks to big business & big government.

On your last point, yes, that's the type of strategy/business I'm referring to.

 

[PZ99]

This article covers the whole deal if you have a spare 5 minutes

Taxable profits
If a company's income exceeds its expenses, it has made a profit, which in ordinary circumstances is taxed at the legislated rate, which for big companies such as Telstra and the big banks is 30 cents in the dollar.

Dividends
After the tax is taken out, companies can pay some of what's left to shareholders as a dividend, one for each share.

Last September Telstra paid shareholders a dividend of 15.5 cents per share. The previous March it was 11 cents.

Income tax
Australians pay tax on what they earn, unless the income is classified as not taxable or is below the $18,200 tax-free threshold.

The marginal rate (the rate on extra income) climbs with income, so that anyone earning more than $180,000 (the top threshold) pays 45 cents on each extra dollar earned.

Dividends are taxable and so are taxed along with other income.

Dividend imputation
In 1987 in what he hailed as a world first, Labor treasurer Paul Keating introduced a rebate for each tax-paying dividend recipient.

Taken off their tax would be the company tax the company had paid on the part of the profit that had been handed to them as a dividend.

It would greatly reduce the existing bias in the tax system which taxed interest income once, but dividend income twice.

Here's how it would work at today's tax rates.

• Jill owns 1,000 Telstra shares
• Over the period of a year she gets dividends of $265
• To provide them, Telstra made a profit of $379 on which it paid $114 tax
• Jill pays tax on the full $379 but gets a credit of $114 that can be taken off any other tax she owes that year
• As with other tax credits, it can be used to cut Jill's tax bill as far as zero, but not to turn it negative. It can't be handed to her in cash.

As Mr Keating put it, the tax paid at the company level would be imputed, or allocated to shareholders by means of imputation credits.

But not to all of them. Non-resident (overseas) shareholders couldn't get them, and nor could shareholders whose dividends hadn't been franked.

Franking credits
As Mr Keating explained, the tax credit only applied to the extent to which full Australian company tax had been paid; to the extent to which the dividends had been franked (stamped) to indicate that tax had been paid.

Not every company pays the full 30 cents in the dollar in every year. Often it is carrying forward previous losses.

Only dividends from profits on which full tax had actually been paid were to be marked "fully franked". Dividends on which tax had been partly paid were to be marked "partly franked".

Fully franked dividends became sought after, because they brought with them the biggest franking credits.

In a useful side effect, dividend imputation encouraged companies that wanted to look after their shareholders to pay full tax.

Refunds to non-taxpayers
Although the particular Australian design arguably was a world first, dividend imputation or something similar is not unusual.

Many countries have systems in place that to a greater or lesser degree ensure company profits are taxed only once — among them Canada, New Zealand, Chile, Mexico, Malaysia and Singapore, whose system is called "one-tier" tax.

Many that did adopt it later moved away from it, using the money saved to cut headline tax rates; among them Britain, Ireland, Germany and France.

What is unusual is what Australia did next. In 2001 after more than a decade of dividend imputation, the Howard government supercharged it, paying out franking credits in cash to shareholders who didn't have any or enough tax to offset.

From the point of the view of these non-taxpayers, dividend imputation became a negative income tax: instead of them paying the government money, the government paid them money.

As far as is known, it is an enhancement that has not been copied anywhere.

On one hand, it makes sense because it treats non-taxpayers the same as taxpayers by refunding them the same amount of company tax.

On the other hand, it does not make sense because it means that instead of being taxed once (at either the company or the personal level) as was the original intention, company profits can escape tax altogether.

Untaxed super
From 2007 the change mattered to many more retirees.

The Howard government's "Simplified Superannuation" package made super benefits paid from a taxed source (that's most super benefits outside of the public service) tax free when paid to people aged 60 and over.

A quirk in the wording of the Act went further. Not only did super withdrawals become tax free, they also became no longer included in "taxable income" and so didn't need to be declared on tax forms.

This meant that many retirees on reasonable super incomes were no longer taxed at reasonable rates on their other income, including income from shares which could be untaxed if it fell below the tax free threshold.

And because of the 2001 decision to send dividend imputation cheques to shareholders who were untaxed, these retirees who suddenly found themselves untaxed also got imputation cheques mailed to them from the government.

Self-managed super funds, whose income is tax exempt in the retirement phase, also got imputation cheques.

In July 2017 the Turnbull government wound back tax-free super by limiting it to accounts with less than $1.6 million. The restriction was to hit 1 per cent of super-fund members.

Labor's proposal
Treasury's 2015 tax discussion paper prepared for the Abbott government referred to "revenue concerns" about dividend imputation cheques.

They cost the budget just $550 million in the year the Howard government introduced them, but $5 billion per year by 2018 and were on track to cost $8 billion.

Labor's proposal, announced in mid-March 2018, was to return the divided imputation system to where it had been before Howard changed it in 2001, and to where it still is elsewhere. Tax credits could be used to eliminate a tax payment but not to turn it negative.

Labor allowed exceptions for tax-exempt bodies such as charities and universities who would continue to receive imputation cheques alongside dividends.

Pensioner guarantee
Two weeks later, in late March, Labor amended its policy by adding a "pensioner guarantee". Pension and allowance recipients, even part-pensioners, would be exempt from the changes and would continue to receive cash payments.

Also exempt would be self-managed super funds with at least one member who was receiving a pension or part-pension at the date of Labor's announcement, March 28, 2018.

The change cost relatively little (the budget saving over the next four years fell to $10.7 billion from $11.4 billion) because most of the imputation cheques go to Australians with too much wealth to get even a part pension.

Self-managed super funds
Retail and industry super funds pool their members' contributions, and so almost always have tax to reduce, meaning most would be unaffected by the withdrawal of cash credits.

Self Managed funds usually represent just one person, or a couple; their funds aren't pooled with anyone else's.

This means that in the retirement phase, where fund earnings are untaxed, most do not have enough tax to reduce. So they get imputation cheques, which they would no longer get when Labor's policy was implemented.

The Parliamentary Budget Office expects some self-managed funds to change their investment mix and some owners of self-managed funds to transfer their investments to retail or industry funds.

Retirement tax
There is no such thing. The phrase is shorthand for Labor's proposal to withdraw dividend imputation cheques from dividend recipients who are outside the tax system.

https://www.abc.net.au/news/2019-02...-imputation-retirement-tax-explained/10799230

 

[Smurf1976]

If you end up getting this franking credit back as cash you are in effect getting back the company tax that as paid on the original enterprise.

Correct.

If I own shares in xyz then I am a part owner of the company. "Company" paying tax = I am paying tax since I am part owner of the company.

The tax free threshold is 18,200 so for simplicity let's say that's my actual income, $18,200.

If I earn that income working as an employee for any business or government then how much tax do I pay on that income? Zero.

If I earn that income as an independent contractor or sole trader then what tax do I pay? Zero.

If I earn that income from bank interest, bonds or speculating on currencies then what tax do I pay? Zero.

If I earn that income from capital gains trading shares what tax do I pay? Zero.

If I earn that income from franked dividends paid by an Australian company then what tax do I pay? $5460 under Labor's proposal.

Now if we were going to charge everyone a minimum 30% rate of tax on their income then that would at least be consistent. That the intent is to charge this tax only on franked dividends seems an anomaly to me and a pointless one at that - who in their right mind is going to choose the only form of investment which attracts the tax? Not many.

End result is money gets pushed into other investments, thus helping keep the ASX indices down, and very little tax is collected.

The winners from this are? Well that would be some super funds who can in practice avoid the tax and those pushing alternative forms of investment which avoids the tax. Not taxpayers, they won't get the money, and not individuals who are just being pushed into other investments.

 

[qldfrog]

I find it truly bizarre that government would want to encourage people onto welfare rather than have them provide for themselves.

Smurf, i already mentioned it but do not be surprised, the globalists know that once 50pc or more of the population is on welfare, they maintain power forever.at each election, your platform is take more from the rich, give it to the majority
Lead to unskilled immigration..importing voters...and policies like this one.
I encourage you to follow the socialist experience in France..that i know well but also Spain etc
Shavez style countries in a generation....but very wealthy elites...

 

[HelloU]

I have to say this outrage at the potential loss of dividend imputation refunds (not the actual credits..) has reached peak madness..

Once upon a time Paul Keating decided that investors shouldn't pay doble taxation on dividends that companies had already paid tax on.

So enters the dividend imputation. If you received a fully franked dividend it came attached with a tax credit which said that 30% tax had been paid. You could add this dividend to your personal income and hopefully not have to pay any/much more tax.

Later on 2001/2006 some very clever financial advisors work out a way of justifying to a Liberal government that it was a crying shame if people couldn't actually use that franking credit against their taxable income because, horror of horrors, they didn't have a taxable income They were just so, so poor..

So they convinced the Liberal Party Government to give back real cash to these poor people instead of them using the franking credits against their real actual income.

With this green light in place our very clever financial advisors created structures that enabled their very wealthy clients to not only reduce their nominal income to three fifths of FA BUT to then also get $5 Billion dollars a year of hard earned taxpayers dollars as a very rich cream on the cake of tax avoidance.

The madness now of course is this amazing series of faux justifications for what was always just a smart alec rort of a basically good idea.

to add to the history .......
Bas, In 1998 kim beazley and labor ran an election campaign on "fairer tax systems" for australia.

A benchmark policy was: “Labor will provide a cash refund for those shareholders who can't make use of their imputation credits because they do not pay income tax. This will be a significant benefit for all Australians.”

the liberals won and here we are today cos it was bipartisan.

 

[sptrawler]

No one is forcing you to be overweight in tax and dividend paying Australian companies and have all your investments in super. You've done it for the tax perk? There's a reason why this discussion is unique to Australia?

If you retired in the last 20 years, you are overweight in Australian shares with dividends, it is the only thing that gives any return at all, don't forget you have minimum drawdowns.
So if you are 65 you are treading water, if your 70 you are going backwards, with Bill's idea you will be going backwards from day 1.
Don't forget, you have to pay the pension or be fined, that will mean either bank interest or selling the income producing shares.
It will just turn people off super, as there are no minimums when the money is held outside super, so you can tailor the drawdown to suit your purse.
It will be interesting to see what happens, I know I will be withdrawing 50% of mine, if it comes in.

 

[HelloU]

OT but following others
(i have not seen too many pension phase smsf's that have reduced capital over the last 20 years after minimum withdrawals) ...... my observation, and maybe why things had to change.

with the new super cap rules, if you start with $1M6 and produce zero annual income u r near 100 when things get tricky ....even allowing a little bit for inflation.

what else: under the new non-concessional rules it is very difficult (for young peeps in the future) to build balances greater than $1M6 cap ........ possible but not really a thing anymore.

When peeps are talking about rich people today that may have $1M6 tax free and another $3M in accumulation as a tax dodge...... well they are gunna die eventually and solve that one-off issue if too tricky to fix with pen strokes right now.

 

[sptrawler]

OT but following others
(i have not seen too many pension phase smsf's that have reduced capital over the last 20 years after minimum withdrawals) ...... my observation.

with the new super cap rules, if you start with $1M6 and produce zero annual income u r near 100 when things get tricky ....even allowing a little bit for inflation.

There will be very few, who have the $1.6m after the latest share market rout. IMO.
The options will be go to Industry Funds which aren't affected, or spend it. IMO

 

[HelloU]

yeah spt, but that us why the drawdown is % based and not a fixed $ figure.The less balance, then the less u have to drawdown.

i think there would be many smsf pension peeps that have not seen a reducing balance .....and all this may be a new experience for them. if the fund balance gets low then the old age pension is there so annual income for all old peeps has a floor......... that is how the system is designed to work.

Everyone in old age has a known minimum income level .....and some are above this cos they have tucked away money over the years (to be spent in their old age, not to be kept forever as a tax dodge).

i actually think that if the super balance is not reducing in pension phase then it really is a waste of time for broader australia - and if true we may as well get rid of super and just give all old peeps the old age pension and tax every other cent of their other income at marginal rates.

 

[Humid]

Correct.

If I own shares in xyz then I am a part owner of the company. "Company" paying tax = I am paying tax since I am part owner of the company.

The tax free threshold is 18,200 so for simplicity let's say that's my actual income, $18,200.

If I earn that income working as an employee for any business or government then how much tax do I pay on that income? Zero.

If I earn that income as an independent contractor or sole trader then what tax do I pay? Zero.

If I earn that income from bank interest, bonds or speculating on currencies then what tax do I pay? Zero.

If I earn that income from capital gains trading shares what tax do I pay? Zero.

If I earn that income from franked dividends paid by an Australian company then what tax do I pay? $5460 under Labor's proposal.

Now if we were going to charge everyone a minimum 30% rate of tax on their income then that would at least be consistent. That the intent is to charge this tax only on franked dividends seems an anomaly to me and a pointless one at that - who in their right mind is going to choose the only form of investment which attracts the tax? Not many.

End result is money gets pushed into other investments, thus helping keep the ASX indices down, and very little tax is collected.

The winners from this are? Well that would be some super funds who can in practice avoid the tax and those pushing alternative forms of investment which avoids the tax. Not taxpayers, they won't get the money, and not individuals who are just being pushed into other investments.

They would if they were “taxpayers”

 

[HelloU]

They would if they were “taxpayers”

it is the logic i struggle with ......

some are adamant that the correct tax to be paid on company profits is 30c in the dollar and this must stay with the tax office.

so what is the reason for then asking some dividend receivers to then pay more tax than the 30c already paid?

 

[sptrawler]

i actually think that if the super balance is not reducing in pension phase then it really is a waste of time for broader australia - and if true we may as well get rid of super and just give all old peeps the old age pension and tax every other cent of their other income at marginal rates.

Which from my understanding, is exactly what the U.K, Canada and NZ do.
Our system is just punishing those who saved, to self fund, while rewarding those who spend everything they earn.

 

[sptrawler]

it is the logic i struggle with ......

some are adamant that the correct tax to be paid on company profits is 30c in the dollar and this must stay with the tax office.

so what is the reason for then asking some dividend receivers to then pay more tax than the 30c already paid?

It is ideologically driven, anyone who has money shouldn't have, those who haven't should have.
It's Australia's new vision, the criminals are just a result of the system, the poor are poor because of things outside their control, those with money found it under a tree so really it isn't theirs.

 

[Toyota Lexcen]

Spot on

It is ideologically driven, anyone who has money shouldn't have, those who haven't should have.
It's Australia's new vision, the criminals are just a result of the system, the poor are poor because of things outside their control, those with money found it under a tree so really it isn't theirs.