In my opinion, dividend imputation currently benefits the following groups of people
- All self-funded retirees,
- All age pensioners with share investments,
- Anyone earning less than $87,000 with share investments,
- Everyone with superannuation, and
- Everyone invested in shares
Again in my opinion, Labor’s proposal to reform the dividend imputation system will ultimately take money from the groups of people listed above. Sadly, it is these people who need the dividend imputation system the most.
Firstly, let me explain why we have dividend imputation in Australia.
In some developed countries, like the USA, corporate dividends are taxed twice. Double taxation of dividends occurs when both a company and a shareholder pay tax on the same income.
- The company pays taxes on profits and subsequently distributes a dividend out of its after-tax profits
- Shareholders must then pay tax on the dividend received hence the dividend is double taxed
Dividend imputation is a fair taxation arrangement in Australia that eliminates the double taxation of dividends from a company to its shareholders. For example
- A company earns $1,000 profit
- The company then pays the ATO $300 tax on the profit at the company tax rate of 30%. The company then distributes the $700 balance to the investor.
- The investor receives the $700 as well as a $300 tax credit, known as a franking credit. The franking credit represents the tax the company has already paid.
- The investor must declare $1,000 (the $700 dividend plus the $300 franking credit) in their taxable income.
- The income is taxed at the investors marginal tax rate. The franking credit can be used to reduce any tax liability the investor has. Any excess credits will be repaid to the investor in cash.
The repayment of excess franking credits is excess tax that you have overpaid.
It is the franking credits that makes the dividend imputation system fair for self-funded retirees, pensioners and low income earners, and super funds. This is because, in normal circumstances, it refunds the tax that the investor would not have been required to pay in the first place.
For example, using the case above
- If you are a self-funded retiree, low income earner or a pensioner and you normally do not pay tax you would get the entire $300 tax back.
- If you are a Self-funded retiree, low income earner, or a pensioner and have a marginal tax rate of 15% you would get $150 tax back.
- If you have a superannuation fund or a self-managed superannuation fund and you are trying to increase your savings tax effectively, your fund pays a flat rate of tax of 15%. Therefore, your super would get back $150.
*Remember the tax that is being paid back is money that should never have paid in the first place.
Conversely, if you are an investor on a high marginal tax rate you have to pay additional tax that represents the tax that you should have paid on the dividend.
Again, using the case above
- If you are on the top marginal tax rate, you will have to pay an additional 17% tax (inc Medicare) on the dividend. That is an additional $170 tax on top of the $300 tax already paid by the company and totals $470. This is equal to the top Tax Rate of 47% (inc Medicare)
The contradiction with Labor’s proposal that the investor on the top marginal tax rate will get the full benefit of the 30% franking credit.
Conversely, superannuation funds, self-managed superannuation funds, self-funded retirees and those people on low incomes who are trying to build their investments, actually lose all or part of the franking credit owed to them by the tax department.
It is this money that a Labor Government will use as its own revenue. That is an amount of $5.6 billion dollars per year from all the groups listed above.
Typically, I do not openly comment on political issues. However, in this instance I thought it was appropriate to comment on the proposed changes because, in my opinion, it directly affects everyone.
If you would like to discuss exactly how the proposed changes will affect you personally, please contact me on phone 0437 110 000 or via email firstname.lastname@example.org.
Scope Wealth Management Pty. Ltd. ACN 604 218 688 as trustee for the CM Read Holdings Trust Corporate Authorised Representative (CAR No. : 1235488) of The Advice Exchange Pty Ltd (ABN 55 107 629 194) who holds an Australian Financial Services Licence (No.278937) and Australian Credit Licence (No.278937).
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