Dividend Imputation System In Australia: Tax Rates, Refunds, And Proposed Reforms

Overview of the Dividend Imputation System in Australia

The present subject matter of the case is based on the provision of existing system regarding dividends imputation and reasons for its introduction. After the implementation of dividend imputation, certain objections have been introduced by the labor organizations. They have raised their voice to make certain reforms regarding the process. All the relevant suggestions have been characterized in this case. Further, certain legislative provisions have been mentioned in this report where the matter related to the dividend policies have been included. Considering the facts of the given application, the matter is dealing with corporate tax. According to the historical perspective of corporate taxation, after tax dividends are regarded as double taxation. In this dividend system, the shareholders of a company have an option to be taxed for second times. A classical system of taxation-law is required to be maintained and in this process, the shareholders are making certain investments in a company and the return get from such investments could not be treated as dividends.

Considering the rule, certain facts have come into the light. Dividends imputation helps to eliminate the tax disadvantages and stop the process of distribution of dividends among the shareholders by requiring them to pay their respective marginal rate. In Australia, dividends imputation system can be observed. According to Australian Taxation Office Guide, The Australian tax system allows companies to determine the proportion of franking credits to attach to the dividends paid. A franking credit is a nominal unit of tax paid by companies using dividend imputation. Franking credits are passed on to shareholders along with dividends. The process of dividend imputation system has been introduced in the year 1987 by Hawke-Keating labor government. The reason for the introduction of the dividend imputation is that on early stages, a company had to pay company tax on all the profits gained by it. Then it had to pay dividends to the shareholders and the dividend was also taxed for the second time in the form of double taxation. When a shareholder gets franking credit, he may get an option of refund. Considering the importance of the franking credits or franking dividends, it can be regarded as tax effective form of income.

As a simple explanation, for an amount of profit denoted P, the company deriving that profit needs to pay tax at corporate tax rate RC (say, 30%). When the after?tax profit gets distributed to a domestic individual shareholder whose marginal tax rate is RI (45% for example), under a full imputation system that shareholder is only required to pay the differential in tax, which is P*(RI ? RC) where RI ? RC = 15%. The question arises here is, what will happen when a country changes its statutory company tax rate? Further, it has been observed that in a globalised milieu where countries are in antagonism of lowering commercial tax rates to attract overseas investments, most governments bear the pressure to follow their peers and to be in line with other tax jurisdictions. As a result, in a fiscal year where RC reduces, say from 30% down to 20%, the tax rate differential (RI ? RC) is increased by 10% (i.e. from 15% to 25%) in this simple demonstration. What it means is that, if a company paid tax at 30% on its business profit in a prior year but the underlying after?tax profit is later on distributed in the form of franked dividend based on an imputation rate of 1 See Geoffrey Kingston, ‘Dividend Imputation or Low Company Tax?’ (2015) 2 JASSA FINSIA’s Journal of Applied Finance 12. This paper examines the potential for a company tax cut in Australia should the dividend imputation system be abolished. 2 David Richardson, ‘The Case against Cutting the Corporate Tax Rate’ (Technical Brief No 20, The Australia Institute, December 2012). 3 Andrew Ainsworth, ‘Dividend Imputation: The International Experience’ (2016) 1 JASSA FINSIA’s Journal of Applied Finance 58. 2016 JOURNAL OF AUSTRALIAN TAX 2016 VOLUME 18 45 20%, the additional amount of income tax being paid by an individual shareholder is no longer P*15%. Later discussion in this paper suggests that the same individual shareholder is worse off by paying extra tax as a result of the dividend not only being grossed up at a lower RC but also carrying lower franking credits calculated at the same lower RC.  

Corporate Tax Rates and Refunds Available to Shareholders

Further, the labor party is up to the mark to reform the dividend imputation system. According to this system, every company gets an option to pay dividends to the shareholders with franking credit facilities and all the credits have been given to the shareholders out of the profit earned by the company. Therefore, according to the system, if the value of dividend imputation exceeds the tax liabilities of the shareholders, they could get an option of tax refund. According to the claim made by the labor party that this system reduces the individual’s ability to receive any refund as against the dividend imputation. However, all the propositions made by the labor party requires legal appreciation and it needs to be passed in the parliament. In the dividend imputation system, voice has been raised against the double taxation policies of the company tax and it has been stated that company tax could not be formed a part of the double taxation policy. According to the main dividend imputation system, it helps to reduce the tax liabilities of an individual. The provision regarding the credit refund has been inserted by an amendment made in the year 2011. The general company tax rate is 30% and in case the personal tax rate of the shareholder is comparatively lower to the company tax rate, they will get a refund.  According to the labor class, the amendment made in 2001 should be revised and no tax refund should be made under the dividends imputation system. 

In the abovementioned paragraph, it has been observed that the amendments made in 2001 regarding the dividend imputation policies are become the subject of agitation by the labor party. The main ‘apple of discord’ regarding the dividend imputation system is cash refund provision and according to the labor party, this system will vehemently affect the superannuation system of the country. This application of revised dividend imputation is in an upheld condition as no bill has been passed regarding the same. According to the statement of Gareth Atkins ““We understand that these changes, if put in place, will impact on many of our clients. This will not only be those clients with SMSF’s, but also many of our business clients who have accumulated franking credits in corporate entities. While we will be keeping a close eye on developments, at this stage it is too early to make any changes to existing investment or tax planning strategies.”

Proposed Reforms by the Labor Party

There are certain advantages and disadvantages laid down under the claim made by the labor party. The main rationale that applicable in the proposed policies of the Labor Union is to establish the A Fairer Tax System Ending cash refunds for excess imputation. According to them, the current system that has been applicable in the present situation is not sustainable in nature and it will undermine the long-term financial position. Further, it has been pointed out by the party that this system has not been appreciated universally and there are few countries where this system is running. Further, no particular class has been mentioned under this system and therefore, the wealthier shareholders can enjoy these facilities and this affect the medium class shareholders. In addition to this, the policy has been applied to the bodies like certain individuals and superannuation funds. However, no application of this provision could be observed on charities and non-profit organizations. The self-managed superannuation funds are using this policy as their chances to reduce tax liabilities and get refund of cash credit. According to the labor union, the tax system must be fair enough and the cash refund system is motivating the people to invest their money in Australian Companies with an intention to get refund of excessive cash rate as against the company’s tax rate.

However, there are certain disadvantages regarding the claim made by labor party in Australia. According to Gordon Mackenzie, “if cash refunds on franking credits are done away, an implicit 30% tax increase on super and self-managed funds that invests in Australian companies. This creates an incentive for them to put their money elsewhere”. Further, Superannuation leader Tony Negline has stated “This will be the third whack around the chops for retirees. And it may be the straw that breaks the camel’s back.”

According to Gareth Brown (2018), the provision of dividends imputation will not be applied in case a person’s tax rate is low. Further, before the amendment made in 2001, money could not be refunded to the person whose marginal tax rate is lower to the company’s tax rate. However, the tax rate option provided to the individual has been changed and it has been observed that the person can claim for refund their monies in case of lower tax rate criteria. Further, certain supports have been derived from the views stated by Matthew Smith (2016) that “In a low-growth economy, any barrier to future growth is fair game to be considered for removal, so it should come as no surprise that Australia’s beloved dividend imputation system is the target of some debate.” According to this statement, the dividends imputation system has helped the companies to reduce the tax burden over their profits and this system has boosted the investors to endow their money in the corporate section. In this way, the economic structure of the country has been developed and the tax burden over the company has been reduced. In addition to this, the shareholders will get an opportunity to gat certain cash back and that will help the middle and lower class shareholders. It can be stated that the pension holders will also be benefitted from this system. In this way, the retired employees can do certain savings. Further, it has been observed that this system of taxation has helped the corporate taxes to be applied effectively and the reducing amount of tax helps all the shareholders who get dividends from the companies. According to the report made by JASSA (2016), this system motivates the investors and to pay higher price to the company. According to the journal, Superannuation funds and superannuates generally love the current system because imputation credits can be used to create a rebate stemming from the difference between the corporate tax rate (30 per cent) and the super income tax rate (15 per cent). Individuals like it because they use the credits to offset their personal income tax. Meanwhile foreign investors get little or no benefit because tax can only be recouped in the home country.

	2015/16	2016/17
Turnover	$12	$9
Taxable income	$1
Frank Dividend		$100000
Tax rate	30%	27.5%

Source: Author’s creation

The distribution in the dividend imputation system has been stated as under.

(100% − corporate tax rate for imputation purposes for the income year) ÷ corporate tax rate for imputation purposes for the income year.

To work out the corporate tax rate for imputation purposes you need to assume aggregated turnover will be the same as the previous income year.

For the 2016/2017 income year, corporate tax rate for imputation purposes will be 27.5% if either of the following apply:

If the aggregated turnover in 2016–17 was less than $25 million, the imposition of tax will be 27.5%. Otherwise, corporate tax rate for imputation purposes will be 30%.

	2015/2016	2016/2017
Turnover	$12 million	$9 million
Taxable income	$1million
Frank Dividend		$100000
Tax rate	30%	27.5%
Tax payable	$30000	$244000

Source: Author’s creation

According to the tax table mentioned herein, it can be stated that there will be no difference of tax rates, as aggregated turnover in 2016–17 was less than $25 million. Therefore, tax rate will be 27.5 percent. management, it is to be mentioned that in case any further shares of the Yolande has bought the company and the taxable income of the company exceeds $25 million, the rate of tax will be 30% according to the provision of the corporate tax system. 

In this part of the question, it has been asked whether any difference regarding the payable tax by the Yolande and Sigma Pty Ltd will be made if the aggregated turnover become $20 million rather than the $9 million or not. According to the corporate law provision, the rate of corporate tax should exceed to 30% in case the taxable income become $25 million or over. Otherwise, the tax rate will be 27.5%. In this case, the taxable income extend to $20 million. Therefore, it is clear that the tax rate in this case will be same and there will be no differences as the income has not exceed $25 million.

Reference:

“Company tax”. Management , , 2018, <https://www.ato.gov.au/Rates/Company-tax/> [accessed 25 May 2018].     

“Imputation”. in , , 2018, <https://www.ato.gov.au/Business/Imputation/> [accessed 25 May 2018].