Ranting Panda: Dividend imputations: tax paid twice, paid once, not paid at all.

Dividend imputations: tax paid twice, paid once, not paid at all.

by Ranting Panda

Imagine this. You earn $100,000 a year and pay no tax, so the government says, 'hey, you paid no tax here's an extra $4,000'.

Is this cool? Probably if you're the recipient, but is it fair for people who are paying tax? Is it fair on the economy which needs to fund more important things, like hospitals, schools, law and order, and pensions for retired people with no other source of income.

You know a federal election is in the air when the Liberal National Party rolls out one of their scare campaigns. Their go-to fear compaigns are refugees and taxation. The LNP will claim that under a Labor government, Australia will be swamped by 'illegal' refugees and burdened by heavy taxes. Yes, I know that refugees by definition are not illegal, but this doesn't stop the LNP screeching about it. Similarly, many of Labor's policies are not taxes, but that doesn't stop the LNP lying about them and calling them a tax. Who can forget the 'carbon tax' boondoggle, in which companies paid for their carbon emissions. LNP knew it wasn't a tax because it wasn't under the Tax Act. If you pay a toll for using a toll-road is that a tax? Of course not. Similarly, paying a price for carbon emissions is not a tax. The woman behind this charade was Peta Credlin, Chief of Staff to the feckless Tony Abbott, who went on to become Prime Minister. In 2017, Credlin admitted there was no carbon tax; it was just the LNP playing 'retail politics'.

Fast forward to the 2019 federal election campaign. The LNP is again wallowing in retail politics by accusing Labor of burdening retirees with a ... wait for it ... 'Retiree Tax'. This is an even bigger lie than the carbon tax one, because, unlike the carbon PRICE, this policy will not ask anyone to pay money. In fact, it saves tax-payers money. Pretty cheeky then for the LNP to claim it is a tax.

Let me break down what the Labor Party policy is about. In a nutshell, Labor is going to end tax refunds being paid to non-tax-payers for share dividends. Considering, that conservatives are always bleating about welfare and paying money to people who don't pay tax, you'd think they'd be in favour of this ... but no. They'll be the first to argue against socialism, saying it redistributes money from workers to people who don't deserve it. And yet here we are; conservatives demanding government use other people's money to refund tax that retirees haven't paid. Oh, the irony.

Labor's policy refers to dividend imputations, which work like this. You hold shares in a company and every six months, the company pays you a dividend IF the company makes a profit. IF the company makes a profit, they pay tax on it. Then the dividends are paid to shareholders, who declare this as part of their income which they also pay tax on. Who can spot the glaring issue with this? The company paid tax on the profit and the shareholder paid tax on the dividend paid from the profit, so the profit has been taxed twice. To end this little discrepancy, the Labor government under Prime Minister Bob Hawke and Treasurer Paul Keating in 1987, introduced dividend imputations, in which the dividend included an imputation equivalent to the tax already paid. Shareholders then declare the imputation on their tax return, which reduces their taxable income. With me?

But what happens if the tax you owe is less than the dividend imputation? Well, the balance is called an excess dividend imputation and under the Hawke/Keating model, this meant that there was no tax off-set or refund.

In 2001, the Liberal government under Prime Minister John Howard and Treasurer Peter Costello, changed the rules to allow for a cash refund for these excess dividend imputations. This particularly affected retirees receiving superannuation payments which are tax free for people over 60. Australia's tax free threshold is currently $18,200 per annum. If you have a taxable income less than this, then you pay no tax. As a result, many retirees with self-funded superannuation (which is tax free), therefore have a taxable income less than $18,200, so have no tax liability and are therefore entitled to 100% of their imputation credits. So, say a dividend has a 40% imputation on it, and the shareholder had taxable income below the tax-free threshold, they would get the entire 40% paid back to them. Not a bad little earn, huh? Oh, you just received a $10,000 dividend while paying no tax, cool, here's an extra $4,000 to go with it.

(Keep in mind that the World Bank declared Howard to be the most profligate Prime Minister for the last 40 years, because of wasteful spending sprees like this one that cost billions of dollars while adding no value to Australia's economy or infrasture).

If you need this displayed graphically, check out the following video. Note, that stills from the video are provided at the end of this article.

Can anyone see the glaring rort available in the current system?

A retiree with no income, but a bucketload of money in a superannuation account, can effectively have a very small or nil tax liability, so receives a cash refund on the excess dividend imputations. This effectively means the excess imputation has gone straight from the company's profit to the shareholder, without any tax being retained by the government. If the government doesn't receive the tax, then they can't do more important stuff, like fund hospitals and schools.

How big a problem is this? It is $6 billion worth of a problem. $6 billion is more than what the government spends on public schools and child care.

Labor's policy is to end this in a fair way by allowing the dividend imputations to reduce the shareholders tax liability and ending the cash payment if someone is paying no tax. That is the bottom line. Yet, the LNP is marketing this is a 'Retiree Tax' to scare the daylights out of people who are actually being disadvantaged by the LNP's current system and who would benefit from Labor's policy.

Labor has written into their policy a Pensioner Guarantee which will enable pensioners to receive the cash refund. This will protect around 320,000 pensioners from being impacted by this policy, while targeting those wealthier retirees who are not on the pension. Labor's policy will mean that those who receive no pension and who pay little or no tax, will not receive a tax refund if their dividend imputations exceed the tax they paid.

What is wrong with Labor's policy? Nothing. In fact, it is smart economic practice. While the LNP questions Labor's financial capability, it continues irresponsibly defending the payment of $6 billion to people who are effectively exploiting a tax loophole. The LNP have misleadingly argued that Labor's policy will affect Australia's lowest paid, however, they base this on taxable income. Superannuation payments to people over 60 are not taxed, so of course recipients have low taxable income. The Grattan Institute calculated the taxable incomes of people over 65 by removing their superannuation payments and found that the wealthiest 10% had reported taxable income of less than the $18,200 tax-free threshold. In other words, the wealthiest retirees are paying zero tax while receiving significant funds from superannuation and being paid franking credits because their dividend imputations exceed their tax liability. Talk about double-dipping.

Some people have argued that retirees deserve this money because they paid tax all their lives. This makes no sense. The pension is payable for people if they need it and is available to people who paid tax all their lives, however, cash refunds on excess dividend imputations is taking money out of the hands of everyday Australians to fund the lifestyles of the wealthy. More than 80% of the cash refunds paid go to the wealthiest 20% of retirees. The Parliamentary Budget Office revealed that in 2014/15, more than a quarter of these refunds claimed, went to 33,761 self-funded superannuation funds with balances exceeding $2.4 million.

Why would the LNP continue to support this extortionate abuse of taxpayers' funds?

Why would the LNP attack pensions and welfare, while allowing wealthier people to rip-off Australian tax-payers?

Why would the LNP call Labor's policy a tax, when it is ending a tax rort?

The double-dipping into tax-payer funds by the wealthy must end to ensure a fairer tax system for Australians.