Proposed changes to dividends – Shorten’s ‘’own goal’’

Proposed changes to dividends – Shorten’s ‘’own goal’’

Mar 14, 2018 admin Alternative Assets, Australian economy, Equity, news, SMSF 0 Comment

Dividend imputation was adopted by former Australian Prime Minister Paul Keating in 1987. The purpose was to halt the double taxation of income. By way of example; a company like Telstra would do business in Australia, pay tax on earnings, and with funds left over would distribute dividends to its shareholders as a reward for investment. The problem was, the shareholder would then pay tax on the income they receive (including Telstra’s dividend distributions), thereby effectively paying tax on money that has already been taxed.

Keating abolished this ‘’double taxation’’, and effectively allowed a company to distribute a franking credit (based on the tax they had already paid in Australia) with the dividend distribution. The investor would then pay tax on the total amount of income received (dividend distribution + franking credit), thereby only paying tax once.

In numbers, it works as follows;

Let’s assume Telstra pays $7,000 in dividends (from taxed earnings), then they would also distribute $3,000 in franking credits. The investor receives $10,000 in grossed up distributions (adding back in Telstra’s tax already paid to the ATO). The investor now pays tax on $10,000 of income, rather than on $7,000.

The current issue that opposition leader Bill Shorten believes this is a “loop hole’’ if an investor pays no tax – eg a superannuant/pensioner, charity etc, as they effectively get the $10,000. He has characterised it as a class warfare issue, as he carves out religious organisations, charities, and “not for profit” organisations (read Industry Super fund). He is already creating another line of winners and losers.

Looking at the numbers, there are around 28million superannuation accounts in Australia with around $2.5 trillion invested. Some of these are in industry funds (11.1m), some are SMSFs. Not all belong to the top 10% of Australians. Policemen, nurses, tradies etc also have SMSFs as they combine superannuation accounts with a partner. Childcare workers and shop employees might have super accounts with their bank (eg BT Wrap, Macquarie Wrap) because of their employer’s business relationship. We should not be taxing savings.

My argument is, if you want to do something bold, look at broader tax policy.

Why do the Australian States tax the employment of staff (payroll tax)? Don’t you think it is insane already adding an expense when we could be getting people off welfare and into work?

Additionally, why are we happy to travel to New Zealand and pay our share of their GST at 15%, covering ~90% of NZ goods and services? Why do we travel to Europe and pay around 20-25% VAT, and pay for toll roads and emissions when we hire a car? These taxes are choices to pay, and tax expenditure or consumption. They are easier to track and collect. It’s your decision to travel to Italy, pay their GST, hire a car and pay emissions tax. Your nest egg, which is supposed to stop you claiming welfare from the State, should not be taxed.

Be brave Bill. Look beyond the class warfare, and if you are serious about jobs, look at broader reform.

ASFA Superannuation stats

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