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Just a ‘myth’: will dividend reform see investors double-taxed?

Tax time

Two prominent politicians have locked horns over whether changes to dividend imputation policy would see investors taxed twice, with one Labor senator labelling concerns a “myth”.

Labor senator for NSW Kristina Keneally has hit back at arguments against Labor’s proposed changes to dividend imputation credit arrangements, claiming the argument that the proposal will see some investors taxed twice is a “myth”.

Speaking at a Financial Services Council event on Wednesday, the politician said the argument that investors would suffer double taxation as a result of the denied cash refunds was “frankly … an absurd argument”.

“Labor introduced dividend imputation in 1987 because taxing income in the form of dividends was clearly double taxation, but people who don’t pay income tax are not taxed on their dividends either, and so refundability essentially means that no tax is paid on corporate profits in question,” she said.

“Let’s take this a step further. Imagine for a second a theoretical world in which every share in Australia is held by someone who paid no income tax. The company pays tax at the prevailing corporate rate, the company distributes dividends to its shareholders, who are all entitled to a tax refund for the franking credits, and the cash refund is paid to the shareholder.”

In this situation, the entire tax paid by the company is refunded to its shareholders – so effectively, the company has avoided taxation altogether, Ms Keneally said.

“Dividend imputation reform is a continuation of our willingness to make the tough decisions on budget repair, and seek a mandate to implement them.”

Minister for Revenue and Financial Services Kelly O’Dwyer, it’s fair to say, doesn’t share this view.

During a speech given to a Fairfax wealth summit on Wednesday, the minister referred to the proposed policy as double taxation on three separate instances.

Agreeing with Ms Keneally that the original 1987 policy was introduced to protect shareholders from double taxation, she argued that the Howard government’s amendments to the policy in 2000, which allowed those with low or zero taxable incomes to receive a cash refund instead of a tax-offsetting credit, were the final step in fully protecting investors from double taxation.

“People receiving dividend imputation credits could now use these credits to offset other forms of income, while people on lower taxable incomes received their tax credit back in the form of a tax refund – remembering that as shareholders they already paid company tax,” she said.

So, what is it?

The original 1987 legislation branded itself as the “biggest tax cut in Australian history”.

In a media statement, then-treasurer Paul Keating said, “Shareholders will not have to pay tax on dividends if the company has already paid tax on the profits. Instead, they will get an 'imputation credit' for the tax paid by the company.

“This means that shareholders on lower marginal tax rates will even get a net credit on their tax bill.”

According to the Australian Taxation Office, the general idea behind imputation and franking is to prevent double taxation, “that is, the taxation of profits when earned by a corporate tax entity, and again when a recipient receives a distribution”.

In a discussion paper released in 2015, the ATO characterised the 1987 policy as relieving double taxation, with the reformed system a means of making imputation credits “refundable for some taxpayers”.

It continued: “Refundability ensures that the final tax on company profits reflects each shareholder’s tax rate at the time that the profits are distributed. Arguably, this provides for greater neutrality between different types of investments and removes a penalty that would otherwise apply to shareholders who have a lower tax rate (for example, retiree shareholders on relatively low incomes).

“However, as noted above, domestic shareholders may receive higher returns on domestic shares compared to global rates of returns on equities, because of imputation. There are some revenue concerns with the refundability of imputation credits.”

These include the greater incentive for shareholders of closely-held companies to delay their distributions until they have a lower tax rate, in order to receive the refund of tax paid by the corporation.

Just a ‘myth’: will dividend reform see investors double-taxed?
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