Franking credits

A reverse death tax that helps the rich

The dividend imputation system is a rort Australia can’t afford, write Emma Dawson and Tim Lyons.

Australia’s dividend imputation system was introduced by Paul Keating in 1987. Its purpose was to eliminate double taxation on dividends from company profits. Under Keating’s original system, when a shareholder received a dividend from shareholdings in an Australian company, it was subject to personal income tax but, when you did your tax return, you got a credit for the tax already paid by the company. You paid the difference between what the company paid and your marginal tax rate.

Critically, if you didn’t pay any personal income tax, you couldn’t claim the credits from the tax paid on your dividends as you had nothing to claim it against.

In 2000, then-treasurer Peter Costello created a concession that allowed some individuals and superannuation funds to reduce their tax liability beyond zero, so the government owed them money and would give them a cash payment from the tax office if their imputation credits exceeded the tax they owed. Because of this change, Australia is the only country in the OECD with a fully refundable dividend imputation credit system.

It is not surprising most people don’t understand how it works and are easily spooked by the sort of misleading nonsense spouted by vested interests such as fund manager Geoff Wilson.

So what’s the truth? Put simply, for retiree shareholders who pay no income tax, a dividend imputation credit is a cash payment rather than a refund. Since 2000, if you are paid a dividend and have insufficient other taxable income to pay personal income tax during the same financial year, you receive a cheque from the ATO in the amount of the tax the company paid. (As income from super funds is tax free, many wealthy retirees pay no income tax regardless of how much money they earn from their super.) In essence, other taxpayers are funding cash payments from the ATO to shareholders living off investment income who pay no income tax.

The ALP proposes to restore the original system, so imputation credits can be used to reduce tax to zero, but not into negative territory to create a cash payment. While non-taxpayers will no longer receive cash from the ATO, they will still not be paying tax, so this is not a return to double taxation.

The various tax concessions in the superannuation system allow high-income earners to build up very large super balances. They can put extra money into super, tax free. Many operate their super funds as vehicles to minimise tax and build up large capital savings.

As a result of such incentives, they can aim to live off the earnings of the dividends from their selfmanaged super funds, but not to draw down on the capital by selling any shares. Super is used as a key part of estate planning by the wealthy – to save a lot of money to pass on to their children. As Australia does not have death duties, it is passed down tax free.

The current imputation cash refund system is, essentially, a reverse death duty: low and middleincome earners subsidise the estates of the very wealthy by giving them cash payments from general revenue – so they can hoard their money for their kids. It’s both unfair and, at an annual cost of more than $5 billion in forgone revenue, unsustainable.

Labor’s proposed changes are projected to raise $55.7 billion over a decade. Given the challenge of funding the National Disability Insurance Scheme, aged care, schools and hospitals, this a responsible way to raise revenue.

So next time you hear a wealthy retiree complain about this, remember they only need to draw down on their savings and pass on a little less to their kids, rather than asking working taxpayers to keep subsidising their estate planning.

This is an edited extract of a submission by Emma Dawson and Tim Lyons, from public policy think tank Per Capita, to the Standing Committee on Economics’ Inquiry into the implications of removing refundable franking credits.