What is happening at the Australia Institute?

This morning the head of the Australia Institute, Richard Dennis, tells us there is no other imputation systems in the world and we can save biiillliiioonnss by removing it.

Wrong and wrong… But exactly what Fairfax journalist would love to print so he is a very good lobbyist.

First, I assume he has never heard of New Zealand – Australian residents can actually claim New Zealand imputation credits against their New Zealand sourced income. UPDATE they have changed the heading of the article removing this claim. I assume Fairfax New Zealand put Fairfax Australia straight…

Second, and much more importantly, Richard knows that to avoid double taxation of company profits you need to use one of two things.

1. An imputation system where the company pay a high tax rate but if it pays out a dividend to a shareholderthe shareholder  gets the benefit of the tax already paid.

For example a company makes profit of $100. The company pays tax of $30 (30%). The shareholder get $70. Without an imputation system the shareholder pays another $34 (49% is the highest individual rate) so the shareholder only gets $36, and the tax man gets $64 of the $100. But with an imputation system the shareholder gets a credit for the tax already paid buy the company at 30%, so the shareholder pays a top up tax of 19% (49% – 30%). And the shareholder gets $51 and the taxman gets $49. Perfect.

2. The second model is a low rate or exemption model.

This is where you exempt company to company dividends (or you can approach 100% tax rates through a chain of companies if there is no imputation system).

But to stop the double taxation that occurs when the dividend is paid to the final individual/trust/super fund shareholder like in the example above, every developed country has introduced a much lower company tax rate or/and a lower tax rate for dividends.

If you don’t do this dividends stop being paid by companies as it is much better from a tax persepective to keep the money in the company and make capital gains where there is no double tax.

So due to taxpayer response,  less tax is collected if you don’t bring in an intercorporate exemption and a lower company tax rate or dividend rate.

Stop pretending we could save $5 billion a year by removing imputation, unless you have the guts to say you want to keep the 30% company rate as well as getting rid of imputation. Also, you need to say no company will notice and change their practices because they are all pretty stupid. Go on, say it! I dare you…

Finally, if the Australia Institute want to remove imputation and reduce the company tax rate (which is the only reasonable change on the table), I expect they will get lots of funding from Apple and Google. You see, a company with Australian shareholders love the imputation system as any tax they pay are passed to their shareholders as a credit. But that is not the case for non resident shareholders, including most of the shareholders of Apple and Google. These multi nationals, which Richard slammed at a recent Senate hearing for not paying enough tax, would love to pay even less tax in Australia because they can’t pass the credit for the company tax they pay on to their shareholders in other countries.

Richard, do you want the current system (no according to todays rant), a system where there is double taxation that can approach 100% and stops dividend payments (I hope not) or a system with a lower company tax rate that is better than the current system for only one group of people – those evil multi nationals you tell us some much about?

The Australia Institute is just doing the oldest Magician trick – distraction. If we are thinking about the imputation system, or capital gains taxation, or super concessions, or multinational tax payments, or whatever tax, we wont allow our politicians to think about reducing spending because there may be all this extra tax we can raise… But it is a very effective lobbying tool…

Look at my right hand over here…

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
This entry was posted in Income Tax, Tax Policy. Bookmark the permalink.

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