Executive Summary
Australia’s dividend imputation system was introduced by then-treasurer Paul Keating in 1987. Its purpose was to eliminate double taxation on dividends from company profits.
In 2000, the Howard-Costello Government created a concession within the system that allowed some individuals and superannuation funds to reduce their tax liability beyond zero (as originally allowed) and into negative territory, so that the government owed them money and would provide them with a cash payment from the Australian Taxation Office (ATO) if their imputation credits exceeded the tax they owed.
Under the system as it operates now, shareholders can use imputation credits to reduce their overall tax liability as far as possible into negative territory. While the current corporate tax rate is 30 per cent, individual taxpayers pay a stepped rate ranging from zero to 47 per cent. If someone owns shares in a company they are required to pay tax on the income from those shares at their personal marginal rate. If their personal tax rate is more than 30 per cent, they will have to pay the difference; if their personal tax rate is less than 30 per cent, they will receive a credit. This also applies to superannuation funds and is greatly utilized by high-worth self-managed superannuation funds (SMSFs).
Put simply, for some shareholders, a dividend imputation credit is money the government pays them for owning shares.
Because of the change to the system in 2000, Australia is the only country in the OECD with a fully refundable dividend imputation credit system.
In March this year, the Australian Labor Party announced a policy that would see an incoming Labor Government introduce changes to the way dividend income is treated when an individual who owns shares does their personal tax return.
The ALP policy is simply winding back a concession that has grown rapidly over the last 18 years and now costs the budget more than $5 billion dollars in forgone revenue per annum. Doing so will close a tax loophole that is unfair and unsustainable.
The ALP policy to close this tax loophole after almost two decades is a strong and responsible proposal to increase equity in our taxation system and secure revenue to fund essential services.
feature image credit: Ian Campbell
