Dividend Imputation System In Australia: A Brief Overview And Proposed Reformations

Overview of Australia’s Dividend Imputation System

Australia is regarded as one of the few OECD nations that yet operate the system of full dividend imputation. Since the year 1987 the Australian has been constantly operating the dividend imputation system for around 30 years (Barkoczy, 2014). The main changes that was introduced in relation to the operation of this system is the provision for rebate, in which the allowable rebates relating to franking credits prior to 1^st July 2000 was capped based on the tax liability of the taxpayer and any additional imputation credit was vanished. Under the new provision that was introduced during July 2000 was the complete amount of franking credits that is refunded to the taxpayer despite the franking credits goes beyond the tax liabilities. As a result, the shareholders does not occur wastage of excess amount of franking credits and the value of imputations is retained by the taxpayer with lower income and having the marginal personal tax rate less than the statutory company tax rate.

The dividend imputation system in Australia, the organizations are required to keep the records of the franking account that keeps the track of records relating to the franking account that keeps track of the payment of income tax that is made to the ATO (Brokelind, 2014). In the franking account of the company the balance of maximum amount of franking credits that is distributable to the shareholders is reflected. Alternatively, an organization cannot frank the dividends that is the imputation credits is attached to the dividends. An organization cannot frank the dividends higher than the sum of company income tax that was paid.

When a company that is an Australian resident pays tax at the lesser rate in comparison to the statutory tax rate, there would be inadequate franking credits in the franking accounts of the company to make the dividends entirely franked (Coleman & Sadiq, 2013). Similarly, in the circumstances where the organizations do not pays any tax on income following the application of accessible levy offsets the distributed dividends is required to be unfranked dividends. Similarly, in Australia the present system of dividends is regarded as the system of prepayment of tax based on the corporate profits as domestic shareholders generally pay income tax based on the distributed profits of the company in respect of the relevant marginal tax rate (Grange et al., 2014). An important consideration in this regard is that this view is only applied on organizations where all the shareholders of the company are Australian resident for taxation purpose.    

Proposed Reformation of Dividend Imputation System by Labor Party

The dividend imputation operates by providing the Australian companies with the capacities of issuing franked dividends to the shareholders. These represents the dividends that are paid after the tax relating to which the shareholders obtain the after tax dividends as well as the franking credits signifying that the tax of the company is already paid on such income (James, 2014). Under the present system of dividend imputations, the franking credit can be offset against the tax liability of the shareholders or if the tax liability is exhausted the dividends can be redeemed in cash from the Australian Taxation Office. The operation of the imputation is based on the principles of return on equity where the income received from company as dividends should be levied together with the other income at the taxpayer’s marginal income tax rate.  

In the early 1980s several companies in Australian corporations turned out to be highly leveraged that are due in portions to tax the bias favouring the debt financing (Kenny, 2013). The primary reason for introducing the dividend imputation system was to manage the problem relating to the double taxation of organizations profits that are relative to the taxation of the unincorporated enterprises.

The reason for introducing the dividend imputation was to provide the shareholders with the franking credits that can be offset against the personal income tax liabilities (Krever, 2013). In the non-existence of dividend imputation system, the profits of the company may be taxed twice both at the company and later at the personal level.

Dividend imputation system has also disregarded the earlier existing system of distortions that provides incentives for financing debts. Interested is substrate from the corporate income and hence it is only taxed on one occasion when it is received at the personal level.    

A plan of reformation to the dividend imputation system of Australia has been announced by the labour party (Morgan et al., 2013). Under the present system of dividend imputation when an organization pays dividend to the shareholders it possesses the option of passing the credit relating to any amount of tax that is paid by the company on its profits. Presently if the imputation credit is received by the shareholder goes further than the tax liabilities the shareholders would be eligible for the cash refund for the excess amount.

The Labor has proposed that it its intention is to remove the ability of the individuals and superannuation funds in order to receive the excess of imputations of credits from 1^st July 2019 that makes the imputation credits a non-refundable tax offsets. Such change is not proposed to implement on charities and non-for-profit firms (Sadiq et al., 2014). The labour has proposed for the self-managed super funds under the pension mode. The proposal includes cashing the entire amount of holding of Australian shares that can be tax free and the rollover of cash would free up the superannuation account with big funds by enabling the Australian shares as the preferred class of assets.

Advantages of Labor’s Proposed Reformation

The labor has proposed the new arrangements for depreciation and would reward the businesses prepared to invest in Australia with provision of generous write off provision. This would allow the shareholders with the immediate 20% reduction relating to any new eligible asset that has more than the worth of $20,000 (Woellner, 2013). The new proposal for reformation by labor would reverse the change that is made to the policy as this would enable the individuals and super funds to claim refunds for any amount of excess imputation credits that is not employed for setting off the tax liabilities.

The labour policy has the disadvantages as it negatively impact the cash refunds for the wealthy investors. Any form of policy that creates a negative impact on the retirees is regarded as bold and possibly it is politically held to be dangerous (Woellner et al., 2014). Additionally, the labour policy has been negatively keeping with on the negative gearing and capital gains tax. Amid the major disadvantages one of the greatest problems was the aspiration of pushing large amount of money out of money to the older people that does not need it. Such policies not only took out the money from the budget but also ensured that the problems would remain long following the expiration of the political times.

The policy served to entrench inequality of wealth among the citizens. Under the labour policy the income inequality frequently gets attention (Pinto, 2013). The labour policy also suffers from the disadvantages of wealth inequalities in bigger proportions and is accompanied with intergenerational disparities. The labour policies has been criticized widely as majority of Australian rich people holding around 40% of the national income but approximately 65% of the nationwide wealth is held by those that are above the 55 years. The policy designed by the labour is not only to keep the policy but also to garner the same and pass on to their next generation.

The labour proposal suffers from the disadvantage as under the self-managed superfunds in pensions may enable holding members to loss the excess amount of franking credits (Woellner et al., 2016). A question of fairness is raised under the imputation credit proposal by the labor. The policies of effective distribution of assets where one party dies the survivor can retain a portion of their pension and all the franking credits and this ultimately raises the questions of imputation credit. The labor was chasing revenue since it has lost the control on spending and the dividend imputation measure simply overlooked the fairness and was instead classified as brutal tax grab.    

Disadvantages of Labor’s Proposed Reformation

The advantages of the labor policy is that it eliminates the imputation credits refunds. The imputation credits for the individual and the superannuation funds would no longer be considered refundable tax offset. This represents that the imputation credits can be employed lower down the payment of tax however the taxpayer would not be able to obtain the refunds for excess amount of imputation credits (Barkoczy, 2016). The method is considered to be advantageous because it would enable the government to save a budgeted amount of $11.4 billion over the period of four years with $59 billion over the next decade.

The policy of labor would only be applicable to the individuals and to the superannuation funds. Income tax exemption charities and not-for-profit institutions with deductible amount of gift recipient status would still be receiving the refunds. The policy of the labour can be justified based on the criteria that the cost to the budget would be advantageous for the current refunds. Additionally the taxpayers with higher wealth and self-managed super funds might have several options of recreating their tax matters.  The policy of the labour is advantageous as it would assure both the parties in last year that the superannuation levy would remain stable for short to medium term.    

The labor policy is considered advantageous as the proposed policy of Australian Investment Guarantee would enable a business to expense around 20% of their amount of eligible depreciation assets in the very first year of new investments (Woellner et al., 2014). The labor policy is created to fulfil the both the apprehensions of being not as much of costly and by being more incentive oriented for making new venture in the capital assets.         

A conclusive opinion can be formed by stating that the policy of labor is justifiable based on the costs to the budget and labor distributional analysis represents who would benefit from the present refunds (Grange et al., 2014). Additionally the labour policy can be justified by stating that the self-managed superannuation funds might have numerous options of restructuring their tax affairs. The policy enables creating additional changes in the superannuation industry that assures both the parties of stable superannuation funds with stable short and medium term returns.

The system of taxation must be in such a manner that it satisfy the requirements of rising state activities and attaining the objectives of the society. The policy of labour can be considered productive with fiscal adequacy. An important principle of good tax system is to look into the overall development of the nation with sufficient amount for government in improving the welfare and development in Australia (Brokelind, 2014). It can be stated that the labor proposal of removing the imputation credits refund aims at reducing the payment of tax with overall development and welfare of the economy as well.

A good system of taxation is required to follow the principle of diversity. This represents that there must not be any sole or few system of levying taxes to raise funds for government. The labor tax policy is considered to be a good tax policy since tax rate is designed in a manner that it would not only result in revenue for the government but would also save approximately 11.4 billion of the sum over the four year period and $59 billion over the next decade (Sadiq et al., 2014). Since it is largely noticed that the negative gearing, CGT discounts, cost of administering tax matters have always had two sides relating to tax proposal.

The policy proposed by labor can be viewed as tax system that contributed to both government and the public revenue as well. With diverse principles present in the labour policy the principles of fiscal adequacy and equity is better satisfied (Coleman & Sadiq, 2013). The labor policy reduces the excessive amount of reliance on one single base in order to avoid adverse impact on the economy. The labor policy serves as the instrument of economic growth and encourages capital formation.

The corporate tax rate for sigma during the year 2015-16 was 30% this is because the Sigma total turnover was $12 million. However, in the following year of 2016/17 the corporate tax rate for Sigma Pty Ltd stood 27.5% (Coleman & Sadiq, 2013). The company for the year 2016/17 would be classified as small business entity with lower company tax rate of 27.5% for having an aggregate turnover of less than $10 million (i.e. $9 million). 

A resident company in Australia that has undertaken the decision of joining the Australian imputation system might be paying credits with the franked dividend. As evident in the current situation of Sigma Pty Ltd for each of the financial years the imputation credits for the corporate tax rates has stood 27.5 for both the 2015/16 and for 2016/17.

Computation of Tax Payable
In the Books of Sigma
For the year ended 30 June 2017
Particulars	Amount
Assessable Income	10,00,000
Tax Payable (27.5%)	275000

Computation of Tax Payable
In the Books of Yolande
For the year ended 30 June 2017
Particulars	Amount
Australian Sourced Dividend Income
Fully Franked Dividend (Net)	72500
Gross Up Franking Credits	27500
Total Assessable Income		100000
Tax on Taxable Income	24632
Add: Medicare levy	2000
Total Tax Payable		26632

No, the answer would not be different if the shares were purchased by Yolande on 30^th May 2017 since the imputation tax rate would continue to remain 27.5% that would be effective for both Yolande and Sigma. The corporate tax rate for the year 2016/17 was 27.5% and the company had the annual turnover of less than $10 million.

The corporate tax rate for both Yolande and Sigma Pty Ltd would be different because the aggregate turnover limit have surpassed the aggregated $10 million threshold limit and as a result for the financial year 2016/17 the tax payable amount for both Yolande and Sigma would be different. The below stated is the computations for tax payable;

Computation of Tax Payable
In the Books of Sigma
For the year ended 30 June 2017
Particulars	Amount
Assessable Income	20,00,000
Tax Payable (30%)	600000

Computation of Tax Payable
In the Books of Yolande
For the year ended 30 June 2017
Particulars	Amount
Australian Sourced Dividend Income
Fully Franked Dividend (Net)	70000
Gross Up Franking Credits	30000
Total Assessable Income		100000
Tax on Taxable Income	24632
Add: Medicare levy	2000
Total Tax Payable		26632

 

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