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.


Taxing Times,
November 29, 2008

Henry Review speeches

Ken Henry briefing, December 3 2008, podcast