Unsurprisingly, the franking credits scare campaign by the LNP is working. Once again, sensible tax reforms is sacrificed on the altar of short-term politics and the absence of a holistic approach. Once again politics gets in the way of policy making. Once again, fear and obfuscation are winning.

As reported by those who have attended the so called “Parliamentary Inquiry” led by LNP MP Tim Wilson, facts take a back-seat to whipping up a frenzy of fear. All designed to paint the Labor party as the bad guys and the enemy of pensioners – a rather significant category of voters.

Dividend Imputation was originally introduced by the Hawke-Keating Government as part of a tax reform package in 1987. It removed double taxation on dividends paid to shareholders from after-tax profits, which was previously taxed again by the recipient.

The system put in place enabled the tax paid by the company to be offset as a tax credit by the shareholder receiving the already taxed dividend.

Removing double taxation seemed like a good idea at the time, but the rules have changed over the years, making it more and more complex. Also, as company tax on profit is a flat 30%, the other effect of the system was that it benefited those on a higher marginal tax rate more than those on a lower rate.

Originally the benefit of the tax credit was limited to offset other income, but this changed in 2000 when it was changed so that dividend holders could get any excess credit beyond the offset as a cash refund from the tax office.

It’s a silly system, but of course as all things related to taxation, companies and people will – as is their prerogative – take full advantage of it. Hence dividend imputation (tax credits) have become an integral part of planning for share investors, small and large.

Labor’s proposal is to remove the cash refund (basically returning to pre-2000 rules), claiming that it mainly benefits retirees who have considerable retirement savings but low taxable income as they draw down their superannuation funds (which is taxed when accrued).

As this analysis from the Grattan Institute shows, Labor’s claim holds up, whereas the Government’s claim of it hurting “low income retirees” is inaccurate.

But it is still a silly move by Labor. It was designed primarily to increase revenue, not to simplify the tax system, and the attacks on it by the LNP was inevitable.

It is silly because it doesn’t take into account all the intricacies of our taxation system. The dividend imputation issue is complicated by a Superannuation regime further convoluted at every new federal budget; to the delight of tax accountants and the chagrin of those tasked with administering it.

What is needed is a fundamental root and branch review of our whole taxation system. What is needed is a brave Government that is prepared to lift their gaze above the immediate needs of revenue generation, budget surplus reductions and what’s political palatable at the moment

The irony of it is as the last such comprehensive review was commissioned by Kevin Rudd in 2008 and published two years later. Colloquially known as the Henry Review – named after the then Treasury Secretary, now disgraced NAB chairman – it was an aspirational document containing well thought out recommendations for proper and long term reform. (And deserves to be Ken Henry’s legacy more so than his failure to transition to bank chairman!)

As is customary for such documents, the Henry Review was consigned to the too hard basket, sucked up in the ‘longevity vacuum‘ – the absence of long term planning that has beset Australian Governments for decades.

Rudd did try to invoke one of the main recommendations – a resource rent tax – in 2010. Ill conceived in its proposed implementation; it was rushed through as a “super profit tax” which made it an easy target for the inevitable scare campaign by the opposition and of course the mining companies. It ended up costing him his job, Gillard watered it down and the end result was nothing like what was envisioned by the original tax reform recommendations.

Since then, no Government has dared touch desperately needed tax reform.

A Labor Government (any Government) needs to change that and stop the endless tinkering around the edges of a flawed system. While we remain a prosperous nation in a rapidly changing world, we can afford to take our time to get it right, not just “getting on with the job”.

Get My Newsletter

Max once a week, I don't use your email for anything else and you can unsubscribe if I bore you.

Thank you - hope you'll enjoy it!

Pin It on Pinterest

Share This