Understanding Dividend Imputation System In Australia

Corporate Taxation and Double Taxation of Company Profits

The literature in the corporate taxation has from a long time expressed concerns on the system of double taxation of the company profits. This generally refers to the after tax dividends that gets taxed twice in the hands of the shareholders of company. Under the traditional system of taxation the returns of the shareholders from their investment in the companies were not the returns that they received from the companies as dividends that were already taxed at the company level (Miller & Oats, 2016). As a matter of fact the returns of the shareholders are also subjected to personal income tax that is received on the dividends has led to very low realised return for the investors. In other words the classical system of taxation provided the country with the scope of reducing the corporate tax so that they can be more competitive in the international markets for the purpose of investment by the multinational companies.

An incorporated company is generally owned by the shareholders that provide the company with the share capital. Companies usually pay dividends to the shareholders in the form of after tax profits. The dividends forms the vital part of the return for the shareholders. When the shareholders received dividends they are held as taxable earnings (Keen & Mullins, 2017). If the return on shareholders’ equity is levied both at the company level and the personal income level then it is taxed at a much higher level than the other forms of income. The profits of the incorporated companies would be levied at a higher level of tax than in the companies that are incorporated. Majority of the company have made arrangements to avoid or lower down the double taxation of the company income. In Australian, this system is known as the dividend imputation system.

The current dividend imputation system operates by providing the Australian firms with the ability of issuing franked dividends to the shareholders. The dividends are paid from the after tax profit of the company for which the shareholders received the after tax dividend and the franking credit (Fleurbaey & Maniquet, 2017). This represents that the corporate tax is already paid on the dividends. The current system of dividend imputation allows the shareholders to offset the franking credits against the tax liability of the shareholders or given that ability is exhausted the shareholders can redeem in cash from the Australian taxation office. The presentation system of imputation credits operates on the principles that the return on equity to the company income must be received as the dividends and should be taxed together with the other source of income based on the taxpayer’s marginal income tax rate (Woellner et al., 2016). Under the present system of dividend imputation only the Australian residents are held eligible for the franking credits and only the Australian companies can provide the franking credits on the profits from the Australian based investment.

The System of Dividend Imputation in Australia

The current dividend system requires companies to keep accounts of the franking credits accounts that helps in keeping track of the payments that is made to the Australian Taxation Office (Anderson et al., 2016). Under the current system of dividend imputation companies are not allowed to frank the dividends greater than the sum of corporate income tax that has been paid.  

The labour party has made a declaration of reforming the current system of Australia’s dividend imputation system. In the reformations proposed by the labour it includes removing the ability of the individuals and the superannuation funds to receive a refund of the extra amount of franking credits by making imputation credits as the non-refundable tax offset (Barkoczy, 2016). However, such reformation is not proposed to be implemented on the charities and not-for-profit organizations.

Labor’s have recently launched their attention towards the franked dividends which is not a tax on the wealthy people but a tax on the widows. In other words the imputation system that avoids dividends income from being double taxed would stay in place however, the proposal of the labour is to abolish the refund of the extra amount of franking credits (Basu, 2016). The new proposal by the labour includes allowing the super funds and the individuals to claim cash refunds from any sum of extra imputation credits that is not used for offsetting the tax liabilities.

Under the present system of dividend imputation system the domestic shareholders would be benefited in a manner that these shareholders would be entitled to tax credit relating to the company tax that is already paid on the company level. This credit would help in reducing the total personal income tax which a shareholder would be required to pay on the income from dividends (Smith et al., 2016). In other words, taxes that is being paid at the shareholder level under the imputation system represents the top-up sum of tax after taking into the considerations the tax that are already paid in relation to the similar income source namely the income originating from the corporate profits. For example a company is deriving profits at the tax rate of 30% of the corporate profits.  

 For instance, when the company makes the distribution of the after tax profits to the domestic individual shareholders whose marginal tax rate is for example 45% (Long et al., 2016). Under the system of full imputation that particular shareholders is only required to pay the differential sum of tax that is 15% (45-30), rather than paying personal income tax amount along with the corporate tax amount.

Proposed Reforms by the Labor Party

Under the proposed labor’s policy the self-managed superfunds under the pension mode with two member holdings of less than $3.2 million could get effected (Balachandran et al., 2016). This is because the entire amount of their extra franking credits would be lost under the proposal of the labor’s. Concerns have been raised that under the labour proposal there are possibly of chances of losing the franking credits. Critics have raised their concern towards the superannuation funds. Under the current proposal of the labor’s policy of removing the refunds for the dividend imputation credits would affect the low income retirees both from within and outside of the superannuation system (Melia et al., 2016). The labor’s proposal appears to impact individual investors in respect of their superannuation and through the shares that are held by them by outside the superannuation as this would compromise the longstanding neutrality principles of investments.  

Any kind of policy that negatively creates an impact on the retirees is regarded as bold and potentially possess political hazardous move. The labor’s policy is very much on the negative gearing and capital gains tax (Balachandran et al., 2017). Among the many problems identified of the labour policy is the desire of shovel as much amount of money into the budgets of the older people that do not require it. This not only took out large amount of money from the budget, but also ensured that the problems would remain long even after the political times had finished. The policy of the labour is criticized for serving to entrench wealth inequality in the economy.

The labour policy has been criticized based on the grounds of making superannuation tax free for those that are above the age of 60 years. As a result of this there are several people that are above the actual income but lower or zero taxable income people would gain benefit from such policies (McClure et al., 2018). The policies of labour suffers from the disadvantage of negatively impacting the cash refunds for some of the wealthy investors.

The labour policies suffers from the disadvantages of creating income inequality which frequently attracts wide range of criticisms. The policies of the labour has been criticized for promoting large scale wealth inequalities and its policy also accompanies intergenerational disparities (Stewart, 2017). The policies of the labour has been criticized as large number of rich Australian holds close to 40 per cent of the national but the policies proposed by labour would result in around 65 per cent of the national wealth to in the hands of people that are above the 55 years of age. The proposed that is designed by the labour would enable the old age retirees to garner the wealth and pass the same generation after generations.

Advantages and Disadvantages of the Policy

The proposal stated by the labour faces criticism and held by many a disadvantage as many eligible members of the self-managed superfunds would lose excessive volume of franking credits (Cannavan & Gray, 2017). Furthermore, there is also a question of fairness under the present system of imputation credits that is proposed by the labour. The policy relating to the effective distributions states that the survivor of the deceased party would be able to retain a share of pension and the franking credits that brings forward the question of imputation credits.

Apart from the disadvantages the policy of labor’s also has certain advantages which is stated below;

1. Abolishing of imputation credits refund: The policy of the labor is helpful in remving the imputation credits refunds. This constitutes that the imputation credits can be used by the individual taxpayers to reduce the tax liabilities however, the individuals would not be entitled to claim refunds relating to the excess sum of imputation credits (Burkhauser et al., 2015). The policy of labour is advantageous because it would help the government in saving the budget of around $11.4 billion over the period of four years and with a sum of $59 billion over the next ten years’ time.
2. Australian investment guarantee: Another advantage of the labour policy is that it would provide the Australian individuals with the investment guarantee to expense approximately 20% of their qualified depreciable assets in the initial year of investments (Davis, 2016). The policy of labor’s can be considered to be very economical and not much costly. It is very much incentive oriented to make new investment in the capital assets.     

One of the most vital principles of the good tax policy is creating an overall development of the country. The policy of tax should be in a productive manner and yields sufficient amount of resources for the government so that it can perform the rising amount of welfare and development activities (Abraham et al., 2015). To make the system of taxation sufficiently productive it must be broad and both the direct and indirect taxes should find place in it.

Another important principles of good tax system is that it must be suitable for the countries principle of elasticity (Faccio & Xu, 2015). The concept of taxation system includes that the national income should increase in proportion with the economic growth and the government revenue from the taxes should also increase.

Considering the policy of labor it can be stated that the tax system contributes to the government and the public revenue (Nguyen, 2016). The policy of labor contain the diversified principles of fiscal adequacy and the principles of elasticity is better satisfied. The policy of labor is that it reduces the extra reliance on one solitary factors and helps in avoiding the impact on the economy. The policy of the labor helps in serving as the instrument of economic growth and helps in promoting capital formation.

For the income year ended 2015-16 the company tax rate for Sigma stands at a rate of 30%. The main reason for this is that the total amount of revenue turnover stood $12 million which was greater than the aggregate threshold turnover of $2 million (Woellner et al., 2016). Moving towards the subsequent year of 2016/17 the company tax rate that was applicable to the Sigma Pty Ltd was 27.5%. This is because during the 2016-17 Sigma Pty Ltd reported an annual turnover of $9 million which is lower than the threshold limit of $10 million. The company would be classified as the small business entity with an applicable tax rate of 27 per cent.

According to the Australian taxation office a resident corporate firm that has decided to join the Australian dividend imputation system may be paying credits with its franked dividends (Barkoczy, 2016). Similarly in the present state of affairs the Sigma Pty Ltd for each of the financial year of 2015-16 and for the financial year of 2016-17 the corporate tax relating the imputation credits stands at a rate of 27.5 per cent.      

Total amount of tax payable by the Sigma Pty Ltd is stated in the below table:

Computation of Tax Payable
In the Books of Sigma
For the year ended 30 June 2017
Particulars	Amount in ($)
Taxable Income	10,00,000
Total amount of tax Payable @27.5%	275,000

Total amount of tax payable by Yolande is stated below;

Computation of Tax Payable
In the Books of Yolande
For the year ended 30 June 2017
Particulars	Amount in ($)	Amount in ($)
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 amount of Tax Payable		26632

As understood there would be no differences given that the shares that were bought by Yolande on 30^th May 2017. This is because the dividend imputation tax rate would remain applicable at a rate of 27.5 per cent and the same is effective for both the Sigma Pty Ltd and the Yolande. The applicable rate of corporate tax for Sigma Pty Ltd during the year 2016-17 stood 27.5% since the yearly turnover of the company stood $9 million which is below the threshold limit of $10 million set by the Australian taxation office.

The applicable rate of company tax for Sigma Pty Ltd and for Yolande would not be similar. This is because if the corporate turnover for Sigma Pty Ltd surpasses the threshold limit of $10 million then the applicable rate of corporate tax rate for both the Sigma Pty Ltd and Yolade would change. To support the statement the calculations has been stated below;

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

Calculations of Tax Payable
In the Books of Yolande
For the year ended 30 June 2017
Particulars	Amount in ($)	Amount in ($)
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 amount of Tax Payable		26632

Conclusion: 

On a conclusive the report significantly highlights the current operations of the dividend imputation system in the Australian economy. The current system of dividend imputation allows the shareholders to offset the franking credits against the tax liability of the shareholders. While the policies of the labour has attracted criticisms relating to the creating wealth inequalities among the people but also contributes to the government revenue as well.

Reference List:

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