Via the AFR:
The mental image of urbane fund manager Geoff Wilson taking up a placard and protesting outside parliament is enough to put a smile on the face of anyone in the market.
But it could well happen.
Wilson’s fury at Labor’s proposed changes to dividend imputation rules, which would stop individual and super funds claiming cash refunds for excess imputations credits not used to offset tax liabilities, has been bubbling along for some months.
This is not some genteel campaign to arrest an injustice. The Labor reform is considered and in the national interest.
The fateful decision in 2000 by former Treasurer, Peter Costello, which allowed the conversion of franking credits into cash refunds for shareholders costs the Budget dearly. This enabled tax-free (mostly wealthy) superannuation holders over the age of 60 to claim imputation credits even though they pay no tax. The Australia Institute explains:
When companies pay dividends to Australia shareholders out of after-tax profit, shareholders also receive ‘franking credits’ which are a credit against their own tax obligation and based on the tax paid by the company. This system, known as ‘dividend imputation’ is unusual and only 4 other countries in the world use it.
However, in 2000 Mr Costello made the system even more generous to shareholders by allowing them to get a cash refund if they receive more in ‘franking credits’ than they actually owe in tax. Because income from superannuation is tax free for people over 60, high income retirees can use franking credits to get a cash gift of over 40 cents for every dollar they receive in dividends.
The ATO estimates that Peter Costello’s decision to allow ‘excess’ franking credits to be refunded as cash cost $4.6 billion in 2012-13.
Labor proposes to abolish cash refunds from July 1, 2019 thereby saving the budget $5.6 billion in the first full year, rising to $8 billion a year over the medium term.
“The imputation system I introduced did not incorporate ‘cashbacks’ for those taxpayers whose average income tax rate was less than the 30 per cent corporate rate,” Mr Keating told The Australian.
Mr Keating, who served as Treasurer (1983-91) and Prime Minister (1991-96), said the current system introduced by John Howard and Peter Costello needed reform because it saddled the country with huge imposts on the budget that are no longer affordable outside boom times.
“This provision, introduced by the Howard government in its search for the grey vote, replete with budget surpluses a la the China boom, was simply unnecessary largesse, as was the concomitant removal of tax on large superannuation accumulations for taxpayers over 65 years of age,” Mr Keating said.
“These two policies were funded by a spike in national income — a spike which has since disappeared, but left us with these large permanent structural budget costs.”
It also received endorsement from Forager Funds Management’s Gareth Brown:
“For one, it would remove a large distortion in our system, one that sees a dollar retained by a company worth less than one paid out to a low-tax rate shareholder,” Brown writes. “This explains the immense pressure on Australian companies not to cut dividends unless they’re on their death bed. In a sensible world, there’s no such thing as an underwritten dividend reinvestment plan”…
Beyond dollars and cents, Brown believes a change to the rules would make it “fairer”. If we’re going to have a tax system, why shouldn’t companies’ full profit streams be subject to corporate tax – “or should it only be wage slaves paying for hospitals, schools, defence and roads?”.
However, other vested interests than Wilson have also claimed it will ‘rob’ retirees. For example, here’s the SMSF Association:
“It is our contention that this proposal will affect more than one million Australians saving for their retirement and other purposes. Our calculations show it will cut about $5000 of income from the median SMSF retiree earning about $50,000 a year in pension income. To be saying these people won’t be paying any more tax is just semantics”…
And here’s the Australian Shareholders Association:
“The ASA calls on politicians to stop jeopardising the planning of self-funded retirees by tweaking the tax system,” ASA chief executive Judith Fox said, commenting on proposals outlined today by Labor leader Bill Shorten.
“Retirees and future retirees have structured their investments to take into account the receipt of dividends from companies that pay the tax rate in Australia, knowing that the excess tax paid will be refunded,” she said.
She said the proposed changes would “penalise investors” who had bought high dividend-paying shares of companies which had paid 30 per cent tax in Australia.
“The potential for ongoing tweaking throws retirement planning into disarray,” she said.
If the goal of dividend imputation is to avoid double taxation, then it makes absolutely no sense to allow retirees paying zero or minimal tax on their superannuation earnings to then also receive cash refunds for their franking credits. Such a situation is not only inequitable and effectively a subsidy to the (mostly) rich, but the cost to the Budget is simply too high to be ignored.
The fact of the matter is that Peter Costello should never have changed the dividend imputation rules in the first place, and should only have permitted investors to offset franking credits against tax that they have paid. This was the initial rationale behind dividend imputation – i.e. that tax gets paid on company profits, but not twice over when paid out as dividends.
