Tuesday, February 24, 2009

Why not axe dividend imputation? Henry gets serious.

And how. The Review is taking shape.

MILLIONS of Australian mum and dad investors face the loss of their imputation tax credits as part of what Treasury head Ken Henry says is shaping up to be the most comprehensive policy review ever undertaken in Australia.

Ramping up expectations of his Henry Tax Review, the Treasury boss told a Sydney conference it was considering axing the system of dividend imputation introduced by former Treasurer Paul Keating more than 20 years ago.

It has ensured that investors in Australian icons such as Telstra, BHP, CSR and Coles Myer paid no or little income tax on their dividends in those in years in which the companies paid the full rate of company tax.

It has also provided benefits to Australian superannuation funds.

Dr Henry told the conference it was "not surprising" that Australian investors and superannuation funds liked the tax-free dividends.

But he said it and other Australian tax provisions made little sense in a world of massive global capital flows...

By extending to Australian investors a concession not available to foreign investors, it made it harder for Australian companies to get access to funds - a process he referred to as "capital shallowing".

A cut in the company tax rate funded by axing dividend imputation would boost the
would also attract more foreign investment, increasing real wages and boosting share prices and Australia's gross domestic product.

The Melbourne consultancy Lateral Economics believes axing dividend imputation would free up $20 billion per year, enough to fund a cut in Australia's corporate tax rate from 30 per cent to 19 per cent.

The company tax rate could then be cut even lower if the new rate boosted the size of the Australian economy in the way expected.

Lateral Economics believes a cut in the headline corporate tax rate to 19 per cent would boost foreign direct investment in Australia by about one-quarter.

It says the resulting boost in share prices should more than compensate the Australian mum and dad investors who missed out on their imputation credits.

The UK and Ireland have already abolished their dividend imputation schemes leaving Australia and New Zealand as two of the only nations to retain them.

Dr Henry said he did not want to be interpreted as "arguing the case for doing away with imputation".

"Our system has some distinct advantages. For one thing as imputation credits are only provided for Australian tax paid Australian multinationals have fewer incentives to shift profits offshore."

The Treasury Secretary also raised the possibility of abandoning Australia's existing system of corporate taxation in favour of "more dramatic, far-reaching change".

One idea would be to tax by destination rather than origin so that imports would be taxed and exports would be tax free. Another would be to tax business spending rather than profits.

He said while such changes would involve significant costs, "sometimes change is necessary.

The Henry Review will report to the Treasurer in December. It is accepting submissions until May.

Background:

Taxing Times,
November 29, 2008

Henry Review speeches

Ken Henry briefing, December 3 2008, podcast

9 comments:

Anonymous said...

What a great idea Ken, lets go back to company profits being taxed twice!!

Hell if the shareholder is earning the top marginal rate your tax take might get up to $0.765 of the profit distrbuted...seems fair to me...NOT!!

Anonymous said...

it is great if you merely serve the domestic economy but if you serve the international economy it is very good

Anonymous said...

If you actually read what Ken Henry said have a look at the whole speech:

http://taxreview.treasury.gov.au/Content/Content.aspx?doc=html/speeches/02.htm
The clossest he comes to saying anything about doing away with dividend imputation is:

"But I don't want to be interpreted as arguing the case for doing away with imputation. Our system has some distinct advantages. For one thing as imputation credits are only provided for Australian tax paid, Australian multinationals have fewer incentives to shift profits offshore. If ending imputation means an increase in incentives to artificially shift profits offshore or otherwise avoid company tax, the reduction in the company tax base could have ongoing revenue consequences."

In fact he argues that it is fair:

"Moreover, for small businesses, the company income tax combined with the imputation system ensures that business owners face much the same tax consequences irrespective of the form in which they receive income from the company; whether it be as dividends, wages or interest."

So where did you get your information Peter?????

Anonymous said...

Peter

Your comment about paying little or no tax on franked dividend show how ignorant oyu are of the tax system. If I get a fully franked dividend of $7 and its imputation credit of $3, then I am taxed as if I had received $10. Which, even if I am on the most popular tax rate ie 30% plus Medicare Levy means that I pay 31.5% tax on it. This is not tax-free income!!! It's no different to having PAYG tax taken out of employment income. I'm still paying full tax on the amount, I'm just not being double taxed.

For an alleged finance journalist you show considerable ignorance of the tax system!

Peter Martin said...

Dear Anon 3,

Much of Ken Henry's speech is about dividend imputation.

He makes the case for getting rid of it by pointing out that many of the arguments made for it no longer apply.

He is also careful to point out that what many now regard as the key argument for it - removing "double taxation" was never its primary rationale.

Yes, he does say "I don't want to be interpreted as arguing the case for doing away with imputation."

He is not arguing the case, he is putting the case, and inviting people to outline why they believe it should still exist.

He believes that there may still be a case for it for small businesses.

Peter Martin said...

Dear A 4,

Let's look at the National Australia Bank's guide to franking credits (the first one that came up on Google):

"Dividend imputation allowed many companies to pay dividends that are effectively tax free"

Anonymous said...

A4

Individuals on a 31.5% MTR will only pay Medicare Levy on a fully franked dividend after the rebate of the franking credits. Hence the term 'effectively tax free'. You should be more than a little embarassed.

Chris said...

Do you realise you used the word "boost" five times in five sentences?

Peter Martin said...

Noted Chris.

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