From a very long time the corporate taxation literature has stated its concerns relating to the system of the double taxation for the organizational profits. This commonly consists of the dividends that are paid after tax is getting levied is getting levied twice on reaching the hands of the shareholders (Balachandran et al., 2016). Under the previous taxation system the returns that were provided to the company shareholders did not represented the returns that were received by them since at the company level it was already taxed. It is understood that the shareholders returns were subjected to personal income taxation which is received in the form of dividend and has eventually contributed to the lower returns for the shareholders. The traditional taxation law system enabled a nation with the chance of lowering the company tax as they can more competitive in the overseas market in order to make overseas investment in the multinational firms.
Usually companies that are incorporated are owned by shareholders since they offer the company with equity shares. Dividends are generally paid by the company in the form of after tax profits (Melia et al., 2016). The dividends is regarded as the important element of assessable income for the shareholders. On noting that taxes are imposed on the shareholders both at the company as well as at the personal level then it results in higher amount of taxes liability for the shareholders. The profits that are made by the incorporated companies at taxed at the greater level than the profits at the corporate level. A large number of companies have made arrangement in order to escape the consequences of double taxation or reduce the tax liability. This is system is known as dividend imputation in Australia.
The present system of dividend imputation works by offering the Australian companies with the capability of issuing the franked dividend to its shareholders. These dividends are paid from the companies after tax profits that results the shareholders to receive the after tax dividends and franking credits as well (Balachandran et al., 2017). This constitutes that the company taxes are already paid on the dividends. The present system of dividend imputation works by allowing the shareholders with the ability of offsetting the franking credits against their tax liability or alternatively if the ability is exhausted then the shareholders can redeem the franking credits in cash at the Australian taxation office.
The current system of dividend imputation works on the values that the return on equity at the company level income should be received as dividends and should be levied for taxation purpose together with the alternative source of income under the marginal income tax rate (McClure et al., 2018). The current system of dividend imputation is applicable on the Australian resident and only the Australian citizens would be entitled to franking credits. Additionally the current system of dividend imputation works by only enabling the Australian companies to offer franking credits for the profits that are made from the Australian investment.
The present system of dividend imputation mandatorily requires an organization to maintain the records of franking credit accounts which provide the facilities of monitoring the payments which is made to the Australian taxation office (Stewart, 2017). Under the present dividend imputation system organizations are prohibited from franking the dividends higher than the amount of the company tax rate which is paid.
In a declaration made by the labor party there is need for reforming the present system of dividend imputation. The recent reformation that has been proposed by the labour comprises of removing the capability of individuals along with the superannuation funds to receive the refund of the excessive amount of the franking credits (McClure et al., 2017). The labor proposes to make non-refundable tax offset for the imputation credits. It is worth mentioning that these reformation are not to be applied on the charities as well as the non-profit making organizations.
In a recently launched reformation proposal, the labor have stated their attention in the direction of the franking credits that does not constitutes tax on wealthy people but tax on widows. Alternatively, the dividend imputation that circumvents imposing double taxation on the dividends would continue to operate but the recent proposal of the labor includes removing the refund of the extra sum of the franking credits (Cannavan & Gray, 2017). The new proposal that is made by the labour comprises of enabling the super funds as well as the individuals to claim cash refunds from the extra amount of the imputation credits which is not employed in setting off the taxes that are levied.
The current dividend imputation system enables the Australian shareholders or in other words the domestic shareholders to benefit in a way that they would be to claim the tax credits that is already paid at the organizational level (Burkhauser et al., 2015). The tax credit provided to the shareholders assist in lowering down the personal income tax consequences which the shareholders would have been required to pay on the dividend income. An important benefit is that the taxes that is paid by the shareholders at the company level constitutes the top-up amount of the tax after considering the tax which is already paid on the identical source of income.
This consists of the income that arises from the corporate profits. For instance an organization that is generating profits at a rate of 30% on company profits (Davis, 2016). Additionally, the corporate firms distributes the after tax profits to the domestic level shareholders under the marginal tax rate of for example 45%. Under the present system of dividend imputation the shareholders would only be under obligations of paying the differences in the accounting which constitutes 15% (45-30), instead of paying taxes on the personal amount together with the company tax rate amount.
In the recent proposal that is made by the labor people that would be impacted are the self-managed superfunds and the pension funds that has two member holding of lower than $3.2 million. The full sum of excess franking credits will be lost due to the proposal of the labor policy. Several concerns have been bought forward that the present proposal made by the labor would possibly results the Australian to los the franking credits. Additionally the critics have voiced their opinion regarding the superannuation funds (Balachandran & Nguyen, 2017). In the recent proposal that is made by the labour for abolishing the refunds of extra amount of imputation credits would possibly create an impact on the lower income people that are retired both from inside and outside of the superannuation system. The proposal of the labor not only impacts the lower income retirees but also the individual investors as well. This is because the shares held by the investors out of the superfunds would compromise the principles of neutrality investments.
Policies that creates an effect on the retired people are regarded as the bold policy and possibly consists of the political hazardous move. According to the argument stated (_) the policy of labour is regarded as the negative gearing and capital gains tax. Amid the several problems identified by the Abraham et al., (2015) one of most adverse impact creating policy is shoving as much as amount of money in the older people budgets that hardly require it. As a result of this, such measures not only took the money out of the budget but assured the problems would continue to remain even after the expiry of the government terms. According to Faccio & Xu, (2015) the policy of the labour promotes economic inequality.
In an argument laid forward by Nguyen, (2016) the policy of labor is criticized for making the superannuation free of tax for people that are above 60 years old. Consequently there are numerous people that although above the real income but zero people are below the taxable income and as a result these people would gain unnecessarily from such policy. Critics have stated that labors policy suffers from the disadvantage of effecting negatively the cash refunds for investors are wealthy.
According to Balachandran et al., (2017) the policy of labour possess disadvantage in creating inequality of income among the people. Labors policy attracts wider criticism for creating large amount of wealth inequalities and introduces intergenerational disparities. In a criticism laid down by Chang et al., (2017) the policy of labor is criticized because there are large number of rich in Australia that holds close to 40% of the nation’s wealth but in the recent proposal made by the labor would unnecessarily shovel large amount of nations wealth among those people that are above the age of 55 years. The policies of the labour are generally directed towards the old age people to garner the large sum of wealth and then passing on to the later generations.
As stated by Dixon & Nassios, (2016) the proposal of the labour is criticized because several eligible members of the self-managed superfunds would be forced to lose extra sum of franking credits. The policy of labor brings forward the questions of fairness in the economy from the proposal made by the labour regarding the dividend imputation.
In spite of the above stated disadvantages of the labor’s policy there are certain policies that also very much advantageous and the same is stated below;
Removal of imputation credits refund: According to McLaren & Cormick, (2018) the labor’s policy is held advantageous for removing the imputation credits refunds. This represents that the individual tax payers can use the imputation credits to reduce their liability to tax however, the excess amount of the imputation credits would not be entitled to refunds. The labor’s proposal is held advantageous since it would benefit the government in saving a budgeted $11.4 billion over the period of four years and around $59 billion in the coming decade.
Australian investment guarantee: The policy of the labor is regarded as advantageous because it would provide the Australians with the investment to expense around 20% of the assets that are qualified for depreciation in the first year of investment. According to Cummings & Wright, (2016) the labors policy is regarded as very much economical. The policy of labor is incentive oriented and promotes new capital assets investment.
The system of taxation should be such that it fulfils the requirement of the increasing the activities of the state and attaining the goals of the society that has been placed before it. The good tax policy should act as the instrument for economic growth (Carling, 2015). Economic growth is primarily characterized as promoting a higher rate of capital formation. Given that the strategy for development is assigned with the task of capital formation in the public then the same should occur at a faster rate. This requires mobilisation of the resources by the government in order to finance the capital of the public sector. Therefore, the good tax system should be such that it enables a nation to mobilise the sufficient amount of resources for capital formation of economic expansion.
Another attributes of good tax policy is that taxation system should be such that it helps in promoting equal distribution of wealth and minimize the economic inequalities (Cormick & McLaren, 2018). The objective of the good tax system in an economy is not just to increase or generate the revenue for the government but also to make sure that the burden of taxes should not fall more on those that earn less. Indeed the burden of taxation should fall more on rich.
Taking into the account the policy of labor an important assertion can be bought forward that that it contributes to government and public revenue (Carling, 2015). The labor’s policy possess diversified standards of fiscal adequacy and the policy of labor better meets the system of elasticity. The policy of labor helps in reducing the excessive amount of dependence on one single factor and assist in avoiding the adverse impact on the economy. It can be stated that the policy of labor helps in serving as the tool for economic growth and promotes capital formation among the people.
As evident, the company tax rate for Sigma Pty Ltd stands 30 per cent for the financial year ended 2015-16. This is due to the fact that the total sum of sales turnover or the revenue turnover for the company during the year was $12 million which is higher than the threshold limit of $2 million revenue turnover (Dixon & Nassios, 2016). On the other hand in the financial year of 2016-17 the company tax rate that would be applied on the Sigma Pty Ltd is 27.5 per cent and the primary reason for this tax is that the company has recorded the yearly revenue turnover of $ 9 million which is below the $10 million threshold limit. This would result the company from being classified as small business entity with a tax rate of 27.5 on its revenue.
As stated by the Australian taxation office resident companies which decides to join the dividend imputation system would be required to pay credits with the franked dividend declared by the company. Taking into the account the situation of Sigma Pty Ltd for the financial year of 2015-16 and for the financial year of 2016-17 the imputation credits would be taxed at a corporate tax rate of 27.5%.
The total sum of tax that is payable by the Sigma Pty Ltd is enumerated in the table below;
The total sum of tax that is payable by the Yolade is enumerated in the table below;
If the shares are purchased by Yolande on 30th May it would not result in any difference. The reason behind this is that the applicable tax rate for the dividend imputation stands 27.5% and the tax would also be effective for Sigma Pty Ltd as well as for Yolande. The tax rate that would be applied on Sigma Pty Ltd for the financial year ended is 27.5% because the annual turnover of the business was $9 million that lower than the threshold limit that is stated by the Australian Taxation Office.
The tax rate that would be applied on Sigma Pty Ltd and the Yolande is different. The reason for this is that the annual turnover for Sigma Pty Ltd has gone past the threshold limit of $10 million resulting a change in the corporate tax rate for Sigma Pty Ltd and the Yolande. The calculations are performed below;
Conclusion:
On arriving at the conclusion it can be stated that the present system of dividend imputation works by offering the Australian companies with the capability of issuing the franked dividend to its shareholders. However the labor arrived with the proposal of making non-refundable tax offset for the imputation credits. The report signifies that Labor;s policy attracts wider criticism for creating large amount of wealth inequalities and introduces intergenerational disparities. However the labor’s proposal is held advantageous since it would benefit the government in saving a budgeted $11.4 billion over the period of four years and around $59 billion in the coming decade. Overall, it can be stated that the policy of labor helps in serving as the tool for economic growth and promotes capital formation among the people.
Reference List:
Abraham, M., Dempsey, M., & Marsden, A. (2015). Dividend reinvestment plans: a tax-based incentive under the Australian imputation tax system. Austl. Tax F., 30, 435.
Balachandran, B., & Nguyen, J. H. (2017). Carbon Risk and Dividend Policy in an Imputation Tax Regime.
Balachandran, B., Henry, D., & Vidanapathirana, B. (2016). Long-Term Price Reaction to Dividend Reduction in an Imputation Environment–Evidence from Australia.
Balachandran, B., Khan, A. R., Mather, P. R., & Theobald, M. (2017). Insider Ownership and Dividend Policy in an Imputation Tax Environment.
Balachandran, B., Khan, A., Mather, P., & Theobald, M. (2017). Insider ownership and dividend policy in an imputation tax environment. Journal of Corporate Finance.
Burkhauser, R. V., Hahn, M. H., & Wilkins, R. (2015). Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), 181-205.
Cannavan, D., & Gray, S. (2017). Dividend drop-off estimates of the value of dividend imputation tax credits. Pacific-Basin Finance Journal, 46, 213-226.
Carling, R. G. (2015). Right or rort? Dissecting Australia’s tax concessions. Centre for Independent Studies.
Chang, C. W., Chen, M. C., & Chen, V. Y. (2017). Are Corporate Tax Reductions Real Benefits under Imputation Systems?. European Accounting Review, 26(2), 215-237.
Cormick, R., & McLaren, J. (2018, January). Dividend imputation: a critical review of the future of the system. In Australian Tax Forum (Vol. 33, No. 1).
Cummings, J. R., & Wright, S. (2016). Effect of higher capital requirements on the funding costs of Australian banks. Australian Economic Review, 49(1), 44-53.
Davis, K. (2016). DIVIDEND IMPUTATION and the Australian financial system.
Dixon, J. M., & Nassios, J. (2016). Modelling the impacts of a cut to company tax in Australia. Centre for Policy Studies, Victoria University.
Faccio, M., & Xu, J. (2015). Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), 277-300.
McClure, R., Lanis, R., Wells, P., & Govendir, B. (2017). The impact of dividend imputation on corporate tax avoidance and controlling for outside director monitoring.
McClure, R., Lanis, R., Wells, P., & Govendir, B. (2018). The impact of dividend imputation on corporate tax avoidance: The case of shareholder value. Journal of Corporate Finance, 48, 492-514.
McLaren, J., & Cormick, R. (2018). Dividend imputation: a critical review of the future of the system. In Australian Tax Forum (Vol. 33, No. 1, p. 141). Tax Institute.
Melia, A., Docherty, P., & Easton, S. (2016). Net share issues and the cross?section of equity returns under a dividend imputation tax system. Accounting & Finance, 56(4), 1097-1117.
Nguyen, H. K. (2016). A question of the integrity of the dividend imputation system when corporate tax rate changes: An Australian study. J. Austl. Tax’n, 18, 43.
Stewart, M. (2017). Australia’s Hybrid International Tax System: Limited Focus on Tax and Development. In Taxation and Development-A Comparative Study (pp. 17-41). Springer, Cham.
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