As I made clear last month, Treasurer Scott Morrison was lying by omission regarding the supposedly uncompetitive corporate tax rate in Australia. This was because he omitted to mention franking or imputation credits, which decreases the tax rate from the headline rate to a much lower effective rate1.
Now Morrison is at it again, and on much the same topic. The reason for this is that the Labor Party has announced they will get rid of cash refunds for excess imputation credits. The system of imputation credits was introduced by Paul Keating in 1987 to prevent the double taxation of company profits (by the company as tax on their profits and by the shareholder as income tax). Howard and Costello extended this to allowing individuals and superannuation funds to claim cash refunds for any excess imputation credits not used to offset their tax liabilities2. These cash refunds comprise money taxpayers have paid as tax. We are giving money to people who own shares and have arranged their income so as to pay no tax. This is effectively negative taxation.
Much as I hate to admit it, Adam Creighton explained it reasonably well in the Australian (I don’t subscribe to a Murdoch rag as a matter of principle). On the one hand, a retired couple living in a $2 million house, with $3.2 million in super, are classified as ‘low income’. They have no income tax liability. They could also have an investment property and still wouldn’t have a tax liability because of the bizarre ‘seniors and pensioners’ tax offset’, which lifts their effective tax-free threshold to about $58,000. As a consequence, they would get a cheque from the taxpayers of Australia for any imputation credits. On the other hand, a working couple living in an $800,000 home, with a mortgage, earning $100,000 a year combined income will be classed as ‘high income’. Being in the second-highest tax bracket, they will pay a 37% marginal tax rate on every extra dollar earned3. In one of the most extreme examples; one very wealthy individual in Australia has arranged their tax affairs so they have no taxable income, but because of the Howard and Costello excess dividend imputation, they received a cheque from the taxpayer for $2.5 million in a single year4. This was in addition to the dividends paid to them by the companies whose shares they owned. The benefits of this system flow overwhelmingly to the wealthiest Australians. Modelling has shown that 75% of the benefits of dividend imputation flowed to households with incomes in the top 10%4. This system costs the Australian taxpayer more than $5.5 billion per annum
Finance Minister Mathias Cormann lied when he said “If you are a self-funded retiree on a low income, you will pay more tax. If you are a pensioner who invested in some shares, you will pay more tax. More than a million retirees, many of them pensioners or part pensioners, will pay more tax under this proposal”5. Cormann lied by omitting the word ‘taxable’ from between ‘low’ and ‘income’ in his diatribe. This is lying by omission. He also states when he says they will be paying ‘more tax’. That is a lie. They will not be paying more tax; they just won’t be getting a cheque provided by us.
Like Cormann, Morrison also lied by omission, stating that “Labor wants to steal your tax refund”5. It is not a tax refund, because these people have not paid tax. They already have the dividends from the companies in which they hold shares; they just won’t get a subsidy from the rest of us taxpayers.
The overwhelming majority of those receiving significant taxpayer cheques are high net worth individuals who minimise their taxable income using negative gearing and family trusts, and, if over 60, by boosting their superannuation. You will never hear this from Mathias Cormann or Scott Morrison. You will also never hear that the Treasury was looking at this very same measure prior to Morrison’s 2017 budget6. These two are past masters at lying by omission.
Sources
- http://www.blotreport.com/australian-politics/liberal-partys-raison-detre/
- https://www.theguardian.com/australia-news/2018/mar/13/labor-to-axe-cash-refunds-for-wealthy-investors-saving-114bn
- : https://www.theaustralian.com.au/business/opinion/adam-creighton/labors-proposed-tax-reform-only-adds-to-complexity/news-story/0fde5c9e9a0324d053ab5eda0494f634
- http://www.canberratimes.com.au/national/how-some-of-the-wealthiest-australians-pay-negative-tax-20180313-p4z45l.html
- https://www.smh.com.au/politics/federal/government-lashes-labor-s-59-billion-tax-hit-as-anti-growth-20180313-p4z430.html
- https://www.smh.com.au/politics/federal/treasury-considered-dividend-imputation-policy-reform-before-2017-budget-20180313-p4z444.html
The myth of the economic management strengths of Howard and Costello are slowly unravelling for those who haven’t yet come to grips with the reality. First there was the structural deficits they left as a result of their profligate tax cuts and “middle class welfare”. Then the exposure of the costs associated with their absolutely disgraceful concessions to gas developers (between 40 and 90 BILLION dollars of revenue foregone), now the revelation regarding the hugely generous handouts to superannuants via imputation AND tax free income streams for over 60s. Surely the first action Shorten should take is to remove Costello from the Future Fund, which does little other than provide huge fees to the managers.
Do you people ever no what you talk about. Because you know absolutely NOTHING about franking credits or franking credit refunds.
For a start, the tax deducted from dividends and sent to the ATO belongs to the shareholder- whether that shareholder is a smsf or not- doesn’t matter. The tax paid belongs to the shareholder. It’s just the same as the tax deducted from wages and sent to ATO belongs to the worker. Very, very similar, but one way it’s a franking credit- the other is a group certificate.
Now both the employee and the shareholder have to lodge tax returns and pay tax on ALL their income. This includes GROSS wages, and GROSS dividend, even though neither received, in their hands, the Gross payment.
Once the tax returns are done, and the total tax payable is calculated then BOTH may deduct from the tax bill the tax already paid. The amount allowed to be deducted is as per the Group Cert. or Franking Credits.
This calculation results in either further tax payable, or a refund of excess tax paid.
It has nothing to do with rich man/ poor man as labor would have you believe. Labors plan is simply denial of a tax refund.
Morrison and Turnbull are you correct.
You guys are wrong and your ignorance astounds..
John,
I know how franking credits work. You are just obfuscating and seemingly trying to protect your income stream at taxpayers’ expense. A company pays tax on their profits and you want to give the shareholders who pay no or little tax a gift from us taxpayers. I think not. It is a lurk inflicted on the Australian taxpayer by Howard and Costello.
How at tax payer expense ?
John,
It is money which has been paid by the company on its profits (those that do pay tax of course; many don’t). Dividend imputation was created to stop people paying tax twice on company profits (once by the company at the corporate rate, and once by the shareholder at their marginal income tax rate). If the shareholder pays no or little income tax, then under the excess franking credit system, those shareholders get a cheque from the government (us). Essentially, no tax is paid on the profits distributed to shareholders who have no taxable income. That’s how.
Just a bit more info for you.
You should visit both the ASIC and ATO websites to get a full understanding of how Franking Credits work. Don.t worry they both use little words in big type with plenty of pictures for you to look at. You should read these sites before you start calling people liars.
This may come as a shock to you, but the franking credit refunds you all are so uptight about actually have NO impact on the budget at all.
Lets imagine NONE of the shares in the ASX were owned by SMSF. Imagine they are ALL owned by investors, other than SMSF. This could include multinationals operating in Australia, the giant banks, insurance companies right down to small private companies.
When these investors lodge their tax returns there will be tax to pay, (unlike SMSF’s in pension phase) and they will use up ALL the franking Credits as CASH DISCOUNTS off their tax returns. And, if they don’t use ALL the tax credits they are allowed to accumulate without limit, and use them as a cash discount off FUTURE tax bills.
So the entire franking credit pool is given back to the shareholders in the form of tax cash discounts.
This is the existing situation, and Labor’s proposal does not change this.
Now, let’s pretend ALL the shares on the ASX are owned by SMSF’s in Pension Phase.
They all lodge returns, no tax is payable so the entire franking credit pool is refunded.
The Budget/ Government’s position, in a cash sense is unchanged.
One way the give discounts off other tax bills and the amount of the discounts equals the cash refunds they give the other way.
So where is Shortens “loophole”, what is it he needs to fix.
If SMSF’s exited the ASX tomorrow, the Government’s position will be unchanged.
It seems perverse that Shorten is happy for the money to go to mulitnationals and big business instead of to Australian’s
John,
That is why I try to keep things short, so people can understand them. It is a lurk. I realise you have to hammer Shorten as much as you can to try to prevent No. 30 coming around and have Abbott blow a gasket, but you need to think about what you are saying; that the wealthy are deserving (yes I know all franking credit types, such as me, are not wealthy) whereas you can hammer the poor, benefit recipients, NDIS recipients, those on penalty rates, and now those on the minimum wage, for they are scum and unworthy of your thoughts.
You haven’t listened to anything I have said.
If “tax free” super is the problem, fine, fix it, start charging tax on private, non centre-link pensions, by all means. The super base is so wide that there should easily be a tax rate on super in pension phase that we could all live with. All the buzz I here about Labor’s plan ends up around “these people don’t pay tax”
If all super paid even a small % in tax, more would be raised and the burden of would be spread and not just rest with SMSF’s.
Oh yeah, we’ve all heard about the big SMSF’s, but that’s not most of us. And furthermore, even the big SMSF’s would not be even a rounding error on the balance sheet of the industry/ commercial funds.
It’s not right to deny tax returns to the small , private funds just because some-one forgot to tax all funds. It a bad-aid and bad policy.
John,
I agree insofar as tax payable should be proportional to the ability to pay, and if that extends to superannuation, then well and good. I don’t think it is right that someone who earns a couple of hundred thousand from super pays no tax while someone employed on forty thousand also pays about $5,000 in tax. Also you seem to think that these excess franking dividends are in fact a tax return. They are not. If you have a share portfolio, you will still get all the dividends, you just will not get your cheque from us for tax you haven’t paid.
By private pensions I mean ALL non-centrelink ones- union funds, industry funds, commercial funds, Everybody- even Mr S
————– “If you have a share portfolio, you will still get all the dividends, you just will not get your cheque from us for tax you haven’t paid.”——————
That refund comes from the tax deducted from the dividend and sent to the ATO before the dividend was paid – did not come from y’all.
—————-“Also you seem to think that these excess franking dividends are in fact a tax return”——————
They are., in fact
Reference again ASIC ot ATO websites.- Both are very specific and detailed in all aspects of of how this works
—————“This is effectively negative taxation.”———-
FYI “negative tax” is not possible- the ATO will never refund more than it has received. Your’e dreaming if you think that happens.
I am sorry, but either you don’t have a clue about how this works or you don’t want to know and just want to publish incorrect information.
John,
You haven’t paid the tax, the company whose shares you own has paid the tax. As tax revenue it belongs to us taxpayers. It is negative taxation. People who pay no tax get a cheque from the government; that is negative taxation. I realise that it may affect you more than it does me and that it is hard to give up a significant money stream.
—-“You haven’t paid the tax, the company whose shares you own has paid the tax———
Oh, I see, Just like the Australian worker doesn’t pay his/ her tax ( PAYG)- the boss does,
Are you saying Australian workers pay no tax? —–I doubt many PAYG tax payers would agree with you there.
FIY this will not affect on me- when the time comes I’ll be out of the ASX , as will many others.
The buyers of my shares, however, provided they have other sources of income will still claim 100% of the franking credits as a cash discount off their other tax bills.
In other words instead of a refund the Gov will give a discount of the same value. So how is the budget better off ?
My guess is this is going to be another mining tax fiasco with no real net benefit to the Government at all.
John,
Only if they pay tax. If they don’t pay any tax, then they shouldn’t get a handout from me. Keating got it right Howard and Costello were too generous. The mining tax was a joke as it turned out, but only because the big companies have too much power. If we had a proper mining tax, we would have $20 billion, not the paltry $600 million from gas exports.
You can assume the new shareholders do pay tax- because under labor’s proposed changes who else would bother with the ASX. ? Only those that can use the fc’s will bother- So the new shareholders will still get the same “handout” from you – and the “handout” will be equal to the full franking credits on the shares -. just like the other “handout” – The net tax you receive will be unchanged- because the “handout” is unchanged,
BUT you can take comfort in your “achievement”.- —“loophole” plugged.- —Howard and Costello’s “generosity” neutralised.—-Keating vindicated.—- but you still are giving “handouts” at the same “unaffordable rate” as per the original “loophole”— and not $1 more in the coffers,– pity about that – was that the plan.? –Was there even a plan ? A plan that involves “handing out” the same money to different people isn’t much of a plan!
Like the mining tax it will be a dud- but at least with the mining tax you can take comfort by telling yourself that “the big companies have too much power”. This time the screw up is clearly on Labor , and there will be nobody else to blame. Thanks for your time, OVER & OUT
John,
More obfuscation. Keating wanted to stop people paying tax twice and did so. Howard and Costello wanted to stop their mates paying tax at all.
OK
A late reply I admit.
Admin is correct.
It is also my understanding that age pension/part age pension recipients will still receive cash refunds.
Actually I would like to see imputation gradually phased out. Mixing company tax and personal tax was never really a good idea. If you earn dividend income, pay tax at your marginal rate. Simple. No different to paying tax on interest earned on savings.
It could also be argued Imputation distorts investment decisions. Investing to avoid tax may not always be the best option.
If imputation remains then I think removing tax on interest would be fair and reasonable.