The current report would be highlighting the present system of dividend imputation in Australia. the report would seek to address the primary reason for introducing the dividend imputation system and the process involved in the administering of the dividend imputation system. The study would take into the consideration the proposal made by the labour policies to the current system of dividends along with the advantages and disadvantages surrounding the dividend imputation system. The report would be highlighting the attributes that is required in the good in the tax system with appropriate reference to current proposal of the dividend imputation made by the labour.
Australian is viewed one of the few OECD countries that operate the system of full dividend imputation (Barkoczy, 2014). The history of Australia’s imputation tax system spans more that decades. While only some of the countries makes the use of dividend imputation system, majority of the nations have certain structure to administer the issue relating to the double taxation. There are other options that are commonly used namely the rebates or the concessional mode of taxing the dividend income.
There are number of nations that does not consider dividend imputation in the personal assessable income. The major reformations that was made in the dividend imputation system operation includes the provision of rebate, where the allowable rebates associated to franking credits before 1st July 2000 was capped in terms of the tax obligation of the taxpayer with extra imputation credit was vanished (Coleman & Sadiq, 2013). During the year 2000 in July a new system was introduced where the entire sum of franking credits was refunded to the taxpayer even though the franking credit goes past the tax obligations. Consequently, the shareholders did not have to shoulder the wastage of additional sum of franking credit with the amount of imputation is retained by the taxpayer leading to marginal personal tax rate lower than the legal corporation tax rate.
In Australia the system of dividend imputation requires a company to preserve the records of franking credit which keeps the track of records associated to franking account along with the record of income tax payment made to ATO (Grange et al., 2014). As evident in the company’s franking account the balance of maximum franking amount credits is reflected that is distributable to the shareholders. As an alternative a corporation is prohibited from franking the dividends and the imputation credits attached to the dividends. A business is prohibited from franking the dividends greater than the sum of corporation tax that is paid.
When an Australian resident company pays tax lower than the statutory rate of tax an insufficient amount of franking credits would be reflected in the corporations franking credit account in order to make the dividends completely franked (James, 2014). Likewise, where the companies do not pay any sum of tax on income after applying the applicable tax offsets the distributed amount of dividends must be unfranked. In Australia, the current dividend system is viewed as the prepayment of tax in respect of the corporate profits since the domestic shareholders usually pay taxes on the distributed company profits based on the applicable marginal tax rates. It is worth mentioning that this view is applied on companies where all the company’s shareholder is held as Australian resident for assessment purpose.
The dividend imputation system functions by providing the Australian corporations with the facilities of issuing franked dividends to shareholders (Jover-Ledesma, 2014). This constitutes dividends which is paid following tax resulting the shareholders to obtain the after tax dividends together with franking credits signifying the tax of corporation that are paid on incomes. In the current dividend imputation system, franking credits can be offset against the shareholder’s tax liability. Alternatively, if the liability to tax is exhausted dividends can be redeemed in cash from ATO (Kenny, 2013). The functions of dividend imputation system is reliant on the fundamentals of return on equity where income that are received from corporations in the form of dividends must be taxed along with income based on taxpayers marginal income tax.
The primary reason for introducing the dividend imputation was to manage the problem of double taxation of organizations profits in comparison to the tax of unincorporated enterprise (Krever, 2013). The dividend imputation system offers the shareholders with the franking credits that can be counterbalanced alongside the individual earnings tax obligations. However, upon the non-presence of the dividend imputation system the profits of the corporations that is allocated to the shareholders of Australia would be subjected to double taxation. This includes once at the company level and once at the personal level.
The introduction of dividend imputation system has resulted in removal of previously present distortion that offered incentives for financing debt. Interest is subtracted from the company profits and taxes are levied once at the personal level.
The labour party announced a plan relating to the reformation of the dividend imputation system in Australia (Morgan et al., 2013). In the current dividend imputation system when a company pay dividends to its shareholders it has the choice of passing on the credits to any sum of tax paid by the corporates on its profits. Under the current system if the dividend imputation credit surpasses the tax liability of shareholders, the extra amount is eligible for cash refund.
The proposal made by labour aims to remove the individual’s ability and superannuation funds so that it can get the extra sum of imputation credits from 1st July 2019 that makes the imputation credits a non-refundable tax offsets (Woellner, 2013). However, the reformation is not in the direction of charities and non-for profit entities. Another proposal of labour includes the inclusion of self-managed super funds based on pension mode. This includes turning into cash the whole sum of Australian shareholdings which can be tax free and rolling over of cash would assist in freeing up the superannuation account with large funds by allowing Australian shares as the favoured class of assets.
The proposal of labour also includes the new arrangement of the depreciation which would held in rewarding the business to make investment in generous write off provision. Such proposal would help the shareholders in 20% immediate reduction for new eligible assets that has the worth of more than $20,000 (Woellner et al., 2014). The proposal made by labour would held in reversing the change which is made to the policy as it would assist in assuring that the individuals and the super funds would be able to claim refunds relating to any sum of extra imputations credits which is not used in offsetting the tax obligations.
The policies of labour suffers from disadvantages since it negatively creates an effect on the cash refunds of the wealthy investors. There are policies that are viewed as bold and probably held as unsafe since it results in negative effect on those people that are retired. The policies of labour have been criticized because the policies have not been successful in keeping with the negative gearing and capital gains tax (Pinto, 2013). Among the major disadvantages of the labour policies is the objective of thrusting large sum of money in the direction of older people that hardly has any need for it. These labour policies not only pushes the money out of the budget but also makes sure that the problems would remain long after the conclusion of the party-political times.
The policy of the labour serves to remove the disparity of wealth among the peoples. The policies of the labour regularly attracts the attention. The policies of the labour is been under criticism and suffers from the disadvantage of inequality among the wealth in large quantity since the labour policies introduces the intergenerational differences (Bankman et al. 2017). A widespread criticism has attracted the policies of labour as most of the rich Australian are found to hold 40% of their national income however 65% of the Australian health is held by those that are beyond the age of 55 years. The policies of labour has attracted criticism in the areas of self-administered superfunds for pensions which might result the holding members to loss the additional amount of franking credits.
Several researchers have stated that a question of fairness is bought forward in the imputation credit that the labour has proposed. The proposed of making an effective distribution of the assets of the deceased person resulting the other party to retain most of the assets in the form of pension leading to the questions of imputation credit (McDaniel, 2017). The policies of the labour have been criticized for hurrying towards revenue because it has lost the regulation on expenditure and the measures of dividend imputation have merely overlooked the fairness and was later categorized as the cruel tax grab.
Apart from the disadvantages of the labour policies there are certain advantages of the labour policies. The labour policies is advantageous in the direction that the imputation credits and the superannuation funds is not anymore held as the refundable tax offset (Schenk, 2017). This constitutes that the imputation credits can be used to reduce the payment of the tax nevertheless the taxpayers are unable to get the refunds relating to the extra amount of the imputation credits. The labour policies would help the government in saving a large chunk from their budget sum of $11.4 billion in the span of four years with $59 billion in the next decade.
The policies of the labour is only applicable for the superannuation funds and the individuals. The policies of labour can be held as advantageous because income tax exemption of charities and the non-for-profit institutes would be able to get the refunds relating to the deductions of the gifts (Murphy & Higgins, 2016). An important reason for justifying the policies of labour is that the principles of cost to budget as this is beneficial for the present refunds. Furthermore, there are taxpayers that have higher amount of wealth and the self-administered superfunds would help in recreating the matters of taxation. The policies of the labour can appreciated in the advantageous manner as it helps in making sure that both the parties gain from the superannuation as this would help the tax to remain stable for short to medium term.
The taxation system should be in a way that it helps in meeting the requirements of the increasing the activities of the state and achieving the purpose of the community. The labour policies is held as productive in nature based on the fiscal adequacy (Schmalbeck et al., 2015). The attributes of good tax system is to review complete growth of the country with adequate sum of government in enhancing the development and welfare of the Australia. The proposal of the labour in eliminating system of imputation credits refunds targets to lower the payment of the tax with overall growth of the economy.
An attributes of the good tax system is under obligations of following the ideologies of diversity. This constitutes that there should not be a single system of imposing taxes in order to fund for the government (Robin & Barkoczy, 2018). The policies of the labour is held as having the attributes of good tax system because the rate of tax is created in a way which would yield revenues for the government as well as it would also result in savings for the government by $11.4 billion in a time of four years and $59 billion in the forthcoming decade. It is largely found that the negative gearing, CGT discounts and the cost involved in managing the matters of taxation continuously contained two wings of tax suggestion.
The taxation policies of labour is held as the good system of taxation because it comprises of contributions made in the areas of government and the public revenue. With varied amount of principles that is present in policies of labour represents the fiscal adequacy principles with better satisfactions of the principles of equity (Robin, 2017). The policies of the labour lowers the higher sum of dependence on one sole base to avoid opposing effect on economy. The policies of labour acts as the tool for promoting economic expansion and promotes capital formation. The policies of the labour are regarded a progressive tax system with higher amount of taxes is imposed on those that generates higher income (Roe, 2017). The labour philosophy behind progressive taxes is that people with higher income are anticipated to contribute a wider share of public servants than those that are able to pay less amount of tax.
For the financial year of 2015-16 and the rate of corporate tax for Sigma Pty Ltd stands 30%. The primary reason for considering a corporate tax rate of 30% on Sigma Pty Ltd is because the company has surpassed the annual turnover threshold limit of $10 million. In the subsequent year of 2016/17 the Australian taxation office has defined that the form the 2016-17 income year the lower company tax rate is 27.5% (Blakelock & King, 2017). The lower company tax rate of 27.5% is applicable for Sigma Pty Ltd because the annual turnover for the company during the income year stood $9 million which is less than $10 million threshold for small company.
As per the Australian taxation office an Australian resident company that has decided to join the dividend imputation system in Australia may be required to pay the franked dividend. Taking into the consideration the current situation of Sigma Pty Ltd for every financial year the imputation credits relating to the corporate tax rates for the financial year of 2016 and for the financial year of 2017 stands 27.5 per cent.
The below listed tables provides the total sum of tax that is payable by the Sigma Pty Ltd is stated below;
The below listed provides the computation of total amount tax that is payable by Yolande for the financial year ended on 2017 is stated below;
Based on the tax rate the answer is “No”. The primary reason is that the answer would not be held different given the purchase of shares were made by the Yolande during the 30th May 2017. Another important factor involved in the static tax rate is because the tax rate based on the imputation would remain to 27.5 and the same is applied in case of both the Sigma Pty Ltd and for Yolande as well. The rate of corporate tax during the financial year ended 2016-17 stands 27.5 for the Sigma Pty Ltd this is because the annual turnover limit of the company stood less than the small company turnover threshold limit of $10 million.
The rate of corporate tax for Sigma Pty Ltd and for Yolade would remain different. The reason for this is that the aggregate sum of the total turnover threshold have gone past the $10 million limit and this results in different amount of tax payment for both the Yolande and the Sigma Pty Ltd during the year 2016-17. A tabular representation of the total amount of tax that is payable for both is stated below;
Table representing Computation of Tax Payable by the Sigma Pty Ltd is stated below;
Table representing the total amount of tax payable by the Yolande for the financial year of 2017 is stated below;
Conclusion:
The study can be concluded by stating that the dividend imputation system functions by providing the Australian corporations with the facilities of issuing franked dividends to shareholders. However, the proposal made by labour aims at removing the individual’s ability and superannuation funds so that it can get the extra sum of imputation credits. A widespread criticism has been attracted by the labour for thrusting higher amount funds in the pension funds but the policies of labour are advantageous in making sure that both the parties gain from the superannuation as this would help the tax to remain stable for short to medium term.
Reference List:
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