tag:theconversation.com,2011:/africa/topics/franking-credits-6099/articlesfranking credits – The Conversation2020-09-29T02:15:30Ztag:theconversation.com,2011:article/1469152020-09-29T02:15:30Z2020-09-29T02:15:30ZRecord corporate fines don’t deter: here’s a ‘frank’ fix to make penalties bite<p>All things considered, Westpac’s record A$1.3 billion fine for breaching anti-money-laundering laws could have been worse. </p>
<p>Each of the alleged 23 million breaches of the <a href="https://www.legislation.gov.au/Details/C2019C00011">Anti-Money Laundering and Counter-Terrorism Act</a> between 2010 and 2018 carried a penalty of up to A$63,000. So the fine might have been more than A$1 trillion. </p>
<p>The A$1.3 billion equates to three months’ earnings for Westpac. It is A$400 million more than the A$900 million the bank set aside in its half-year results (in April). But that didn’t bother the market. </p>
<p><a href="https://www.asx.com.au/asx/share-price-research/company/WBC/statistics/shares">Westpac’s share price</a> ended the week 7% higher. </p>
<p>As Nathan Zaia, an analyst with investment research company Morningstar, <a href="https://www.smh.com.au/business/banking-and-finance/westpac-announces-record-breaking-1-3b-fine-20200924-p55yno.html">explained</a>: “It’s huge. It’s the largest fine in history. It’s an eye-watering number. But it’s already pretty much been expected by the market.”</p>
<p>With Westpac’s annual profit exceeding A$6 billion, and its market capitalisation more than A$60 billion, Zaia said a few hundred million dollars more didn’t “really have much of an impact with the valuation we put on the bank”.</p>
<p>If the biggest fine in Australian corporate history doesn’t make a difference to a company’s share price, it’s hard to see how that fine serves as a deterrent. It is the job of the board and senior management to serve the interests of shareholders. What doesn’t matter to investors won’t matter much to the board either.</p>
<p>There could be a way, though, to use the tax system to give corporate fines more bite, by making shareholders feel more of the pain.</p>
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Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
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<h2>What franking credits do</h2>
<p>Franking credits – also known as <a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">dividend imputation payments</a> – are tax credits provided to shareholders with their dividend payments. </p>
<p>The credits are intended to ensure income from investment is not taxed twice – first by the company paying tax on its profit, then by the shareholder paying income tax on their share of that profit (their dividend).</p>
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Read more:
<a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">Words that matter. What’s a franking credit? What’s dividend imputation? And what's 'retiree tax'?</a>
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<p>Franking credits on dividends allow shareholders to cut their tax bills by the tax already paid on the dividend income they receive.</p>
<p>In some cases, thanks to a provision in Australia’s law, where the shareholder pays no overall tax, they can receive a tax refund from the government, a <a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">dividend imputation cheque</a>, of the kind Labor promised to wind back in the 2019 election campaign. </p>
<h2>Franking debits as penalty</h2>
<p>There already exists a mechanism to use the imputation system to penalise bad behaviour by companies.</p>
<p>Where a company has not followed the rules relating to franking credits, the tax office can debit the company’s franking account, leaving less to distribute to shareholders as tax credits. </p>
<p>A similar mechanism could be used to impose fines. Instead of the company writing a cheque, the government would debit the value of the fine from the bank’s franking account.</p>
<p>This would directly affect the bank’s capacity to “impute” tax it has paid on profits. </p>
<p>Though the same amount of money imposed as a fine might have little impact on a company’s operations or profits, the loss of franking credits is something shareholders are likely to notice. </p>
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Read more:
<a href="https://theconversation.com/westpac-ticking-every-anti-money-laundering-box-wouldnt-make-much-difference-to-criminals-127988">Westpac ticking every anti-money-laundering box wouldn't make much difference to criminals</a>
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<p>And if shareholders care, the directors might get the message louder and clearer.</p><img src="https://counter.theconversation.com/content/146915/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael William Blissenden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Rather than imposing a straight fine, taking away franking credits would ensure shareholders feel more pain when companies misbehave.Michael William Blissenden, Professor of Law, University of New EnglandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1378892020-05-06T19:50:21Z2020-05-06T19:50:21ZBank dividends are bare. Here’s why some shareholders hate it more than they should<p>In bad news for retirees and others who depend on dividend cheques (and dividend imputation rebate cheques from the Tax Office) bank dividends have largely evaporated. But it’s not as bad as many commentators suggest, and actually good for some investors.</p>
<p><a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2020_Interim_Media_Release.pdf">Westpac</a> won’t be paying a dividend this half year. Nor will the <a href="https://yourir.info/resources/4d216b570d08af30/announcements/anz.asx/3A540286/ANZ_News_Release_ANZ_NZ_2020_half-year_result.pdf">ANZ</a>, nor the <a href="https://wcsecure.weblink.com.au/pdf/BOQ/02224752.pdf">Bank of Queensland</a>.</p>
<p>The <a href="https://www.nab.com.au/about-us/shareholder-centre/dividend-information">National Australia Bank</a> will pay one, but only a third the usual size. The Commonwealth Bank’s different reporting dates mean it won’t have to make a decision <a href="https://www.commbank.com.au/about-us/investors/dividend-information.html">until August</a>.</p>
<p>The Financial Review believes the moves have taken <a href="https://www.afr.com/companies/financial-services/westpac-shareholders-have-long-wait-ahead-on-dividends-20200504-p54plj">A$9.8 billion</a> in expected dividends and <a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">franking credits</a> from bank shareholders to date. </p>
<p>The flip-side missed by many commentators and shareholders is that bank shares are worth more (maybe around $9.8 billion more) than if they had paid those dividends.</p>
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<a href="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=840&fit=crop&dpr=1 600w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=840&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=840&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1056&fit=crop&dpr=1 754w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1056&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1056&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.apra.gov.au/sites/default/files/2020-04/Capital%20management.pdf">APRA letter to financial institutions, April 7, 2020</a></span>
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<p>As it happens, the decisions follow pressure from the Prudential Regulation Authority which last month sent banks an <a href="https://www.apra.gov.au/capital-management">unprecedented letter</a> asking them to “seriously consider deferring decisions on the appropriate level of dividends”.</p>
<p>It isn’t what bank shareholders have come to expect. </p>
<p>The Commonwealth Bank’s <a href="https://www.commbank.com.au/about-us/investors/dividend-information.html">dividend policy</a> says it will aim to pay cash dividends at “strong and sustainable levels”, maximising dividend imputation cheques from the government by paying <a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">fully franked</a> dividends.</p>
<p>The dividend reductions come after sharp collapses in share prices brought about by hits to current and expected future earnings and increased economic uncertainty.</p>
<p>But, as hard as it is to look beyond dividends, imputation cheques and the price of shares, what’s most important for the owners of shares are the earnings prospects for the banks long term. And here, as hard as it might be for some shareholders to accept, the suspension of dividends is a sensible strategy for the banks.</p>
<h2>Cruel to be kind makes sense for banks</h2>
<p>In making decisions about dividends in the wake of bad news, each bank had two options. </p>
<p>One was to keep paying dividends at previous levels. </p>
<p>That would have pushed the share price down further, as evidenced by the typical drop in a company’s share price after dividends have been paid. </p>
<p>With the funds paid out as dividends, and no longer part of the bank’s shareholders funds, each share becomes correspondingly worth less. </p>
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Read more:
<a href="https://theconversation.com/the-last-thing-companies-should-be-doing-right-now-is-paying-dividends-135928">The last thing companies should be doing right now is paying dividends</a>
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<p>It also puts the bank in a weaker position to weather unexpected loan losses if the COVID-19 storm turns out to be even worse than expected. </p>
<p>The other option was to scrap (or reduce) its dividend and avoid the ex-dividend date drop in its share price. It bolsters its capital strength and gives shareholders higher expected capital gains (or lower capital losses).</p>
<p>Broadly, the loss of dividends should be offset to some degree by a higher share price and higher capital gains. </p>
<p>But try telling shareholders that the dividends they have lost can be replaced by selling shares.</p>
<h2>Tax makes retirees hate it</h2>
<p>That they care is in part psychological. Shareholders view a bird (dividend) in the hand as better than one (a capital gain) in the bush. </p>
<p>Selling shares is seen as “dipping into one’s capital”, even though it has the same effect on the shareholder’s capital (the value of shares held) as taking a dividend.</p>
<p>Another reason shareholders care more than you might think is tax. </p>
<p>Typically (based on historical evidence) a franked dividend of $1 leads to a share price fall of around $1. </p>
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Read more:
<a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">Deeming rates explained. What is deeming, how does it cut pensions, and why do we have it?</a>
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<p>But for an investor on a zero tax rate (as many retirees are) that $1 dividend is actually worth around $1.43. </p>
<p>This is because the Tax Office rebates that investor <a href="https://www.marketindex.com.au/franking-credits">43 cents</a> of tax previously paid by the bank, a so-called dividend imputation payment. </p>
<p>Selling $1.43 of shares to compensate for the lost dividend cash flow leaves them worse off.</p>
<p>Super funds on a low 15% tax rate are also likely to prefer payment of franked dividends since they can use the imputation credits to reduce tax on other investment income.</p>
<h2>Tax makes other shareholders like it</h2>
<p>High tax rate investors and foreign shareholders think quite differently. </p>
<p>For high tax rate investors, Australia’s practice of taxing only <a href="https://www.realestate.com.au/advice/what-is-capital-gains-tax/">half</a> of each capital gain can make the higher capital gains associated with higher share prices more attractive than receiving dividends on which they have to pay extra tax.</p>
<p>Foreign shareholders also generally prefer capital gains to franked dividends, since they can’t use Australia’s imputation credits.</p>
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Read more:
<a href="https://theconversation.com/heres-a-radical-reform-that-could-pay-every-retiree-the-full-pension-131289">Here's a radical reform that could pay every retiree the full pension</a>
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<p>Under any tax system where dividends and capital gains are taxed differently, deferring dividends hurts some investors and benefits others. Australia’s imputation tax system magnifies that effect, with low tax rate investors being losers.</p>
<p>As it happens, these features of the tax system took centre stage in last year’s election, in which Labor proposals to change both the rules regarding dividend imputation and capital gains were <a href="https://theconversation.com/going-up-monday-showed-what-the-market-thinks-of-morrison-117396">rejected</a> by voters.</p>
<h2>Longer term, investors might thank banks</h2>
<p>The root cause of the hit to dividends is uncertainty about the future. </p>
<p>If economic conditions turn out worse than expected, banks will find themselves hesitant to make loans unless they have sufficient capital to absorb unexpected losses.</p>
<p>To the extent that they use that capital to help restore the health of the economy, all investors (including those reliant on future dividends) will be better off.</p><img src="https://counter.theconversation.com/content/137889/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Westpac and the ANZ have suspended dividends payments. The National Australia Bank has slashed them. The peculiarities of our tax system explain why retirees hate this more than they should.Kevin Davis, Professor of Finance, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1170752019-05-14T20:12:18Z2019-05-14T20:12:18ZAt last, an answer to the $5 billion question: who gets the imputation cheques Labor will take away?<figure><img src="https://images.theconversation.com/files/274336/original/file-20190514-60532-1s0fi7x.jpg?ixlib=rb-1.1.0&rect=11%2C299%2C3964%2C2125&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Those who'll miss out the most have very high wealth.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Labor is banking on about A$5 billion per year from ending the cash payment of company tax refunds <a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">to dividend holders who don’t pay tax</a>. </p>
<p>It’ll exempt charities, non-profits, pensioners and part pensioners and other Australians on government allowances, including future pensioners. Self-managed super funds that had pensioner members at the time Labor announced its policy will also be spared.</p>
<p>So who’s left? Are they battlers on genuinely low incomes (as might be inferred from the low taxable incomes that enable them not to pay tax), or are they a good deal more wealthy?</p>
<p>The Coalition says they are mainly genuine low income earners. According to Treasurer <a href="https://www.npc.org.au/speakers/hon-josh-frydenberg-hon-chris-bowen/">Josh Frydenberg</a></p>
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<p>over 80 per cent of people who are relying on their cash refunds have a taxable income under $37,000</p>
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<p>Yet Labor’s <a href="https://www.chrisbowen.net/media/183744/180604-updated-factsheet-dividend-imputation.pdf">Chris Bowen</a> says they are </p>
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<p>typically wealthier retirees who aren’t paying income tax - these are people who typically own their own home and also have other tax-free superannuation assets, and don’t pay tax on their superannuation income</p>
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<p>There are two main ways in which people receive company tax refunds that are paid in cash rather deducted from their tax bill. </p>
<p>One is through self-managed super funds that don’t pay tax during the retirement phase. Around 55 per cent of excess refunds are paid out in this way according to our modelling.</p>
<p>The other is through payments made directly to Australians who own Australian shares but pay insufficient tax to make use of company tax credits. These can be retirees whose taxable incomes are low or zero (and not reported to the Tax Office) because superannuation income is non taxable.</p>
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Read more:
<a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">Words that matter. What’s a franking credit? What’s dividend imputation? And what's 'retiree tax'?</a>
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<p><a href="http://csrm.cass.anu.edu.au/sites/default/files/docs/2019/5/research-note-labor-tax-and-child-care-policies-2019.pdf">Modelling</a> just completed by the Australian National University Centre for Social Research and Methods attempts to gets around the lack of Tax Office data by using household income data reported to the Bureau of Statistics. </p>
<p>Household income also includes superannuation income whether it is taxed or not. It can also be a better guide to who benefits from shares held within a household because they are typically held in the name of the lowest taxed member.</p>
<p>Our findings are presented in 2019 dollars and are based on a “mature” policy in the sense that the behavioural changes expected by the Parliamentary Budget Office have taken place. We accept that such changes are subject to considerable uncertainty but expect the distribution of results to hold up regardless.</p>
<h2>Who gets the cheques?</h2>
<p>Across all households, regardless of whether they receive dividend imputation cheques, the average impact from removing the credits would be $489 per year, or about 0.5% of disposable income. </p>
<p>But the impact of Labor’s policy is heavily concentrated in households in the top 10% (decile 10) of household incomes. These households would pay an average additional tax of $2,641 per year (1.1% of their disposable income). </p>
<p>There would be virtually no impact on households in the bottom half of the income distribution. </p>
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<p><strong>Impact of proposed changes to franking credit policy on annual household disposable income by equivalised income decile, 2019 dollars</strong></p>
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<a href="https://images.theconversation.com/files/274331/original/file-20190514-60560-1qsagqi.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/274331/original/file-20190514-60560-1qsagqi.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/274331/original/file-20190514-60560-1qsagqi.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=192&fit=crop&dpr=1 600w, https://images.theconversation.com/files/274331/original/file-20190514-60560-1qsagqi.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=192&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/274331/original/file-20190514-60560-1qsagqi.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=192&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/274331/original/file-20190514-60560-1qsagqi.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=242&fit=crop&dpr=1 754w, https://images.theconversation.com/files/274331/original/file-20190514-60560-1qsagqi.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=242&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/274331/original/file-20190514-60560-1qsagqi.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=242&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Decile 1 is the lowest income decile and decile 10 the highest.</span>
<span class="attribution"><a class="source" href="http://csrm.cass.anu.edu.au/sites/default/files/docs/2019/5/research-note-labor-tax-and-child-care-policies-2019.pdf">Source: PolicyMod, ANU</a></span>
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<p>The impact is even more skewed when considered by wealth distribution of households. </p>
<p>Labor’s changes would have virtually no impact across the bottom 70% of the wealth distribution. Almost 90% of the total value of all imputation cheques are paid to the top 20% of the wealth distribution. </p>
<p>Around 2.7% are paid to the bottom 50%.</p>
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<p><strong>Impact of proposed changes to franking credit policy on annual disposable household income by wealth decile, 2019 dollars</strong></p>
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<a href="https://images.theconversation.com/files/274333/original/file-20190514-60541-c5b24y.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/274333/original/file-20190514-60541-c5b24y.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/274333/original/file-20190514-60541-c5b24y.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=201&fit=crop&dpr=1 600w, https://images.theconversation.com/files/274333/original/file-20190514-60541-c5b24y.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=201&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/274333/original/file-20190514-60541-c5b24y.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=201&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/274333/original/file-20190514-60541-c5b24y.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=253&fit=crop&dpr=1 754w, https://images.theconversation.com/files/274333/original/file-20190514-60541-c5b24y.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=253&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/274333/original/file-20190514-60541-c5b24y.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=253&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Decile 1 is the lowest income decile and decile 10 the highest.</span>
<span class="attribution"><a class="source" href="http://csrm.cass.anu.edu.au/sites/default/files/docs/2019/5/research-note-labor-tax-and-child-care-policies-2019.pdf">Source: PolicyMod, ANU</a></span>
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<p>Overall, around 6.5% of households would be negatively impacted (around 600,000 households). The vast majority have high income and high wealth.</p>
<p>For the low income or low wealth households that would be affected, the impact tends to be relatively small. As an example, for the least wealthy 10% who receive imputation cheques the average financial impact is $686 per year. For the most wealthy it is nearly $12,000 per year.</p>
<p>The interaction of superannuation and Australia’s present dividend imputation system leads to significant tax leakage. Whether removing excess franking credits is the right solution is debatable, but it remains the case that the majority of excess imputation payments go to high income and/or high wealth households who ideally would be paying at least some tax on what they earned.</p><img src="https://counter.theconversation.com/content/117075/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ben Phillips receives funding from the Australian Research Council.</span></em></p><p class="fine-print"><em><span>Matthew Gray has received funding for many Commonwealth, State and Territory governments and a range of other organisations.</span></em></p>It’s the highest earning most wealthy shareowners who’ll be missing the cheques.Ben Phillips, Associate Professor, Centre for Social Research and Methods, Director, Centre for Economic Policy Research (CEPR), Australian National UniversityMatthew Gray, Director, ANU Centre for Social Research and Methods, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1163702019-05-08T01:37:56Z2019-05-08T01:37:56ZIt’s hard to find out who Labor’s dividend imputation policy will hit, but it is possible, and it isn’t the poor<figure><img src="https://images.theconversation.com/files/273056/original/file-20190507-103085-daikn5.jpg?ixlib=rb-1.1.0&rect=54%2C209%2C5115%2C2891&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Taxable income tells us little about who benefits from imputation cheques.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Labor’s proposal to end cash refunds of unused dividend imputation credits is highly targeted.</p>
<p>It certainly doesn’t apply to age pensioners, even part pensioners, courtesy of Labor’s <a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">Pensioner Guarantee</a>. </p>
<p>Self managed super funds set up by pensioners before the announcement are also exempt. Nonetheless it is likely that some pensioners will set up self-managed accounts in full knowledge of Labor’s proposal (the Treasury is reported expect <a href="https://www.theaustralian.com.au/nation/labor-tax-safety-net-to-fail-50000-pensioners/news-story/6e23c6dcdc2b4dfbd7b703f3d7746929?nk=3a30bd776ad137cb35ab968528be3a21-1557277041">3,000 to 5,000</a> per year) which is where the Coalition’s claim that 50,000 pensioners will be affected come’s from. It’s 50,000 over a decade.</p>
<p>Australia has 2.5 million age pensioners.</p>
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<p>Charities and not-for-profit organisations would also be exempt and would continue to receive cash refunds of tax paid by companies that paid them dividends.</p>
<p>Labor says the remaining cash refunds come at a significant cost (about A$5 billion per year), that they benefit wealthier people and that the money could be <a href="https://alp.org.au/policies/reforming-dividend-imputation/">better spent on those less well off</a>. </p>
<p>How did it come to this?</p>
<h2>A Labor idea, extended by Howard</h2>
<p>Dividend imputation was introduced by the <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BN/0910/ChronSuperannuation">Labor Party</a> as part of the treasurer Paul Keating’s tax reforms in 1987. It allowed taxpayers who owned shares and received dividends to use the tax already paid by the company as a credit against their income tax bill.</p>
<p>In 2001, the Howard government extended it by allowing taxpayers whose dividend credits were larger than the income tax they owed to receive the excess amount in cash. This practice is unique internationally, not least because it can allow company profits to escape tax.</p>
<p>Then in a surprise move in 2006, the Howard government’s penultimate budget made superannuation income tax free for most people aged 60 and over. </p>
<p>It had earlier <a href="https://www.theaustralian.com.au/nation/politics/boomers-howardera-tax-breaks-punishing-the-young/news-story/39bb95d2adf5a1d4df16dfc2d450c9a6">lifted the tax-free threshold for retirees</a>, meaning many were unlikely to pay tax and be eligible for imputation cheques even before their super income was made tax free. Many more became eligible afterwards.</p>
<h2>It’s hard to tell who benefits…</h2>
<p>As part of the move to make super income tax free, superannuants were no longer required to declare their superannuation income to the Tax Office, making it hard to tell how well off those receiving imputation cheques really were.</p>
<p>But the Tax Office has released to researchers a series of <a href="https://researchdata.ands.org.au/taxation-statistics-individual-sample-files/644754">confidentialised files of individual income tax returns</a> that provide clues.</p>
<p>The 2% sample of all taxpayers in 2015-2016 contains 269,639 individual records. I’ve focused on those with taxable incomes of less than A$87,000 (222,083 records) because they are the ones likely to receive cash refunds. I’ve excluded those who receive any government pension or allowance as they are unaffected by Labor’s policy, leaving 190,146 records.</p>
<p>The best measure of these people’s wealth in the data is their total superannuation account balances which the Tax Office collects from member contribution statements.</p>
<h2>…although it can be done</h2>
<p>Calculating refunds using tax bands and rules, I find that of the people with taxable incomes less than A$87,000 and with no pension income, 81% have no franking credits and receive no refund cheques. Their average taxable income is just below A$40,000 and their average superannuation balance is just below A$67,000. </p>
<p>A further 15% receive credits of less than A$1,300. Their average refund is A$102. Their average taxable income is also below A$40,000 and their average superannuation balance is almost A$179,000. </p>
<p>Of the 3% of individuals with credits between A$1,300 and A$8,000, the average cash refund is A$1,593. The average taxable income for the group is just over A$37,000 and the average superannuation balance is about A$363,000.</p>
<p>Of the 0.8% of individuals with credits between A$8,000 and A$20,000, the average cash refund is A$4,043. The average taxable income for the group is just over A$53,000 and the average superannuation balance is almost A$455,000. </p>
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<a href="https://images.theconversation.com/files/273020/original/file-20190507-103053-txqprj.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/273020/original/file-20190507-103053-txqprj.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/273020/original/file-20190507-103053-txqprj.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=172&fit=crop&dpr=1 600w, https://images.theconversation.com/files/273020/original/file-20190507-103053-txqprj.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=172&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/273020/original/file-20190507-103053-txqprj.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=172&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/273020/original/file-20190507-103053-txqprj.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=216&fit=crop&dpr=1 754w, https://images.theconversation.com/files/273020/original/file-20190507-103053-txqprj.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=216&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/273020/original/file-20190507-103053-txqprj.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=216&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">Elizabeth Savage/ATO 2015-16 unit file</span></span>
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<p>Of the 0.1% of individuals with credits between A$20,000 and A$40,000, the average cash refund is A$8,743. The average taxable income for the group is just over A$68,000 and the average superannuation balance is just under A$721,000. </p>
<p>For the top group who have credits in excess of A$40,000, the average cash refund is almost A$63,000, over A$1,200 a week. The average taxable income for the group is the lowest of all groups at A$17,735, falling below the lowest income tax threshold. Almost half (45%) have no taxable income. Their average superannuation balance is A$1,344,782. </p>
<h2>It’s the wealthiest who benefit the most</h2>
<p>The results tell a clear story. </p>
<p>The largest average benefits are paid to the wealthiest group.</p>
<p>Their wealth measured by superannuation account balance is 20 times that of the group that receives no cash refund. Their superannuation wealth is 76 times their taxable income. </p>
<p>It is misleading it is to use their taxable income as a measure of their well-being.</p>
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Read more:
<a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">Words that matter. What’s a franking credit? What’s dividend imputation? And what's 'retiree tax'?</a>
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<img src="https://counter.theconversation.com/content/116370/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elizabeth Savage has received research funding from the Australian Research Council and the National Health and Medical Research Council. She has also undertaken commissioned research for the Australian Department of Health and Ageing.</span></em></p>Retirees with superannuation balances of $1. pay and pay no tax and get annual imputation cheques of $63,000.Elizabeth Savage, Professor of Health Economics, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1155782019-04-16T11:43:11Z2019-04-16T11:43:11ZView from The Hill: Why would rational voters believe talk of hundreds of billions and 10-year timeframes?<p>Almost a week into this campaign, many people would be finding their heads hurting. Others would be staying tuned out for a while yet, put off by the cacophony of conflicting claims.</p>
<p>Voters have been bombarded by numbers. Numbers asserted, numbers contested, numbers denied. Numbers in tens, indeed hundreds, of billions. Millions have mostly become the five cent coins of election dialogue (unless they are a subset of the billions).</p>
<p>And the numbers stretch into what, in political terms, might as well be infinity. Plans are for the next decade. Never mind that elections come every three years.</p>
<p>Many of these numbers mean little in themselves. Let’s not say they’re made up. They do, however, have a good deal of confection to them.</p>
<p>The way the carefully-controlled campaign operations work, many of the numbers are dropped out, by government and opposition, embargoed for publication around midnight. The aim is to land them “raw” into the morning news cycle, not masticated by reaction.</p>
<p>The think tanks are enthusiastically in the numbers game. The Grattan Institute this week <a href="https://www.afr.com/news/politics/national/morrison-s-plan-requires-40b-cut-20190415-p51e6l">said</a> the government would need to cut $40 billion a year from spending by 2030 to meet its tax and surplus promises.</p>
<p>“Absolute complete rubbish,” Scott Morrison harrumphed.</p>
<p>Please, can someone remember to check in a decade or so?</p>
<p>There is much to be said for sticking to the four-year timeframe of the budget’s forward estimates (and remember, at budget time the experts often question the assumptions even over that period).</p>
<p>No ordinary people with a life can or will follow all these figures. Anyway, why would any rational voter believe claims involving mega multiple billions and 10-year spans? Peter Costello has drawn attention to the absurdity of promises into the never never.</p>
<p>The government and opposition have been framing their stories, and they think a long “plan” sounds better than a shorter one. And, in trying to discredit the offerings of their opponents, they believe size matters.</p>
<p>The most fanciful example of the latter was the government this week claiming part of Labor’s cancer policy would cost some exorbitant extra amount on the basis of grossly inaccurate assumptions.</p>
<p>But one cohort of voters usually thought to be taking more than average notice of specific numbers is retirees. Moreover, for those nearing retirement, or worried about it, even long term numbers have more than usual meaning.</p>
<p>The government is banking heavily on these people reacting badly to Labor’s plan to cancel cash refunds for franking credits (worth A$57 billion over a decade) and to various proposed changes to superannuation Labor has foreshadowed.</p>
<p>Both sides have different perceptions about how what the government characterises as a “retirement tax” - the refunds crackdown – will play out politically.</p>
<p>The government has produced a table showing the number of individuals (of all ages) in various seats adversely affected (with data based on 2016-17 tax statistics) and the average dollar impact.</p>
<p>For instance, in the Victorian marginal seat of Chisholm, which the government is fighting to hold, more than 10,400 people would be affected, with an average impact of about $2200. In the NSW ALP seat of Richmond those affected would number nearly 8200, with an average impact of more than $1900.</p>
<p>Overall, these figures show 910,000 people affected, with the average impact $2285.</p>
<p>The government would argue those who’d be hit are widely scattered and extend beyond wealthy people who have arranged their financial affairs to minimise their taxable income. So it sees the issue as politically potent.</p>
<p>But Labor says most of those who’d be caught are the better off - and likely Coalition supporters. Pensioners would be exempt.</p>
<p>Notably, some Labor sources say the “retirement tax” is not coming through its research as a big issue, especially once the discussion drills down into the detail of, and rationale behind, the policy. It is a matter of explaining it.</p>
<p>Bill Shorten was blunt in defending the proposed change at his Sunday rally, also translating it into the sort of tangible benefits the savings could buy.</p>
<p>“If you are getting a tax credit when you haven’t paid any income tax, this is a gift,” he told the rally. “It is a gift lifted from the taxes paid by working class and middle class people in Australia today.</p>
<p>"It is a gift that is eating our budget. It’s now costing our nation over $6 billion this year, and pretty soon will cost $8 billion.</p>
<p>"And if all of this talk of billions is too much, perhaps think of it in the following way. Two minutes’ worth of the gift, the money that flows out of this one loophole, two minutes out of 365 days, could pay for someone’s knee replacement surgery. Ten minutes worth of the gift is enough to employ a nurse, full-time, for a year.”</p>
<p>Scott Morrison on Tuesday had his eye firmly on the retiree vote, when he appeared at a forum in the Victorian seat of Corangamite (where Sky reported that many in the audience were Liberal party members who’d been invited to attend).</p>
<p>Morrison gave an assurance of no further imposts on superannuation – a painful issue for the government at the last election. “No new taxes, no higher taxes on superannuation under my Government. Never ever,” he later reiterated at a news conference.</p>
<p>When Bill Shorten was pressed for a commitment on super, he began by saying Labor had “no plans to increase taxes on superannuation” but was then pushed into an unqualified promise.</p>
<p>This overlooked the planned changes to superannuation Labor had announced. Amounting to $34 billion. Over a decade.</p><img src="https://counter.theconversation.com/content/115578/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Both sides have different perceptions about how what the government characterises as a “retirement tax” - the franking credits change – will play out politically.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1115232019-02-11T03:15:39Z2019-02-11T03:15:39ZPoll wrap: Labor maintains Newspoll lead but Morrison’s ratings up, and Abbott behind in Warringah<figure><img src="https://images.theconversation.com/files/258153/original/file-20190211-174890-j1yv7p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">While Scott Morrison remains preferred PM, Labor maintains an election-winning two-party preferred lead in the latest Newspoll.</span> <span class="attribution"><span class="source">AAP/Ellen Smith</span></span></figcaption></figure><p>This week’s <a href="https://theaustralianatnewscorpau.files.wordpress.com/2019/02/web-news-newspoll-11.02.19.pdf">Newspoll</a>, conducted February 7-10 from a sample of 1,570, gave Labor a 53-47 lead, unchanged from last fortnight. Primary votes were 39% Labor (up one), 37% Coalition (steady), 9% Greens (steady) and 5% One Nation (down one) – One Nation’s lowest Newspoll vote since <a href="https://www.theaustralian.com.au/national-affairs/newspoll">February 2018</a>.</p>
<p>43% were satisfied with Scott Morrison (up three), and 45% were dissatisfied (down two), for a net approval of -2, up five points. Bill Shorten’s net approval was down two points to -15. Morrison led Shorten by 44-35 as better PM (43-36 last fortnight).</p>
<p>There has been much debate in the last fortnight about Labor’s proposal to abolish franking credit cash refunds. Voters were opposed by 44-35, but this is down from 48-30 opposition in December. Opposition was strongest among those aged over 65 (59-28 opposed).</p>
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Read more:
<a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">Words that matter. What’s a franking credit? What’s dividend imputation? And what's 'retiree tax'?</a>
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<p>Voters supported reducing investor tax breaks, such as negative gearing and capital gains tax deductions, by a 51-32 margin (47-33 in November).</p>
<p>It has been over five months since Morrison replaced Malcolm Turnbull as PM in late August 2018. In nine Newspolls, his net approval has been in the single digits, positive or negative.</p>
<p>The last three Newspolls of 2018 were all 55-45 to Labor, while the first two of 2019 have been 53-47. I believe the Coalition has been assisted by Morrison’s relative popularity and a greater distance from the events of last August.</p>
<p>In Turnbull’s last four Newspolls as PM, the Coalition trailed by just 51-49, but Turnbull’s ratings were weaker than Morrison’s, with a peak net approval of -6. However, Turnbull’s ratings would have been better if not for the hard right’s hatred of him; it is plausible that 10% of the electorate disliked him from the right. Morrison has no problem with his right flank.</p>
<p>The Coalition is perceived as too close to big business (see Essential below), and <a href="https://www.theguardian.com/business/grogonomics/2019/feb/07/an-interest-rate-cut-might-be-coming-and-the-reason-why-is-rather-scary">Greg Jericho</a> wrote in The Guardian that the latest data are not good for the Australian economy. A key question is whether Morrison’s ratings eventually fall due to the unpopularity of most Coalition policies. Economic credibility is likely to be important if the economy slows.</p>
<h2>Essential poll: 52-48 to Labor</h2>
<p>Last week’s <a href="https://www.essentialvision.com.au/wp-content/uploads/2019/02/Essential-Report-290119-D1-1.pdf">Essential poll</a>, conducted January 23-31 from a sample of 1,650, gave Labor a 52-48 lead, a one-point gain for the Coalition since Essential’s mid-January poll. Primary votes were 38% Coalition (steady), 36% Labor (down two), 10% Greens (steady) and 7% One Nation (steady).</p>
<p>The fieldwork period and the sample size were both larger than usual for Essential – normally Essential is conducted over four days with a sample a bit over 1,000.</p>
<p>By 47-41, voters agreed that one of the reasons why there are relatively few female MPs is that women choose not to get involved with politics. By 46-39, they disagreed with the proposition that voters preferred to elect men, rather than women. By 72-20, they disagreed with women being less capable politicians. Gender quotas were supported 46-40, but Coalition voters were opposed 50-37.</p>
<p>37% supported a separate national day to recognise Indigenous Australians alongside Australia Day, 15% thought Australia Day should be replaced, and 40% did not support a separate day.</p>
<p>At least 50% thought that private health insurance companies, big banks, mining companies and big business wanted the Coalition to win the next election. Labor had a lead on this question with pensioners and people with a disability, and at least 50% with families with young children and the unemployed.</p>
<h2>Seat polls of Warringah, Stirling and Pearce</h2>
<p>A <a href="https://www.canberratimes.com.au/politics/federal/getup-poll-points-to-abbott-electoral-defeat-20190209-p50wqi.html">ReachTEL poll</a> of the NSW seat of Warringah for GetUp, from a sample of 622, gave independent Zali Steggall a 54-46 lead over incumbent Tony Abbott. Primary votes and fieldwork dates were not included in the media report. In <a href="https://results.aec.gov.au/20499/website/HouseDivisionPage-20499-151.htm">2016</a>, Abbott won Warringah by 61.6-38.4 against the Greens, and 61.1-38.9 against Labor.</p>
<p>60% thought Abbott’s performance as a local member poor, and 60% said they were more likely to vote for a candidate who would tackle climate change – 78% among those who had defected from Abbott.</p>
<p>A Labor internal poll of the WA seat of <a href="https://thewest.com.au/news/wa/another-stirling-shock-as-labor-pull-ahead-ng-b881091840z">Stirling</a>, conducted after Michael Keenan announced his retirement from a sample of 950, gave Labor a 1.5% lead after preferences. In <a href="https://results.aec.gov.au/20499/website/HouseDivisionPage-20499-246.htm">2016</a>, Keenan won Stirling by a 6.1% margin. Labor and the Liberals were tied at 36% each on primary votes with 6.8% undecided.</p>
<p>A GetUp <a href="https://thewest.com.au/politics/federal-politics/christian-porter-to-cling-on-to-pearce-getup-poll-ng-b881099034z">ReachTEL poll</a> of the WA seat of Pearce, conducted January 16 from a sample of 674, gave the Liberals a 52-48 lead over Labor (53.6-46.4 at the <a href="https://results.aec.gov.au/20499/website/HouseDivisionPage-20499-244.htm">2016 election</a>).</p>
<p>Seat polls are very unreliable, but Stirling and Warringah are inner metropolitan seats, while Pearce is outer metropolitan. I believe the Coalition will struggle most in better-educated inner metropolitan seats.</p>
<p>The three seat polls were commissioned by left-aligned groups. However, ReachTEL asks for voting intentions first. Media-commissioned polls are superior to polls from political interest groups, but seat polls are unreliable in any case.</p>
<h2>SA byelections and NSW pill testing Newspoll</h2>
<p>Byelections occurred on Saturday in the South Australian state seats of <a href="https://www.abc.net.au/news/elections/cheltenham-by-election-2019/">Cheltenham</a> and Enfield, following the resignations of Labor’s Jay Weatherill and John Rau respectively. Labor retained both seats easily, with primary vote swings to Labor of 6.6% in both <a href="https://www.abc.net.au/news/elections/cheltenham-by-election-2019/results/">Cheltenham</a> and <a href="https://www.abc.net.au/news/elections/enfield-by-election-2019/results/">Enfield</a> since the March 2018 election. The Liberals did not contest either seat.</p>
<p>In an additional question conducted with last fortnight’s NSW Newspoll that had a 50-50 tie, voters were in favour of the NSW government providing a <a href="https://cdn.newsapi.com.au/image/v1/c0fcfeece683fb590526481c920bab92?width=650">pill testing</a> service at music festivals by a 56-35 margin. Over 70% of Labor and Greens voters supported pill testing, while Coalition voters were narrowly opposed 49-45.</p>
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Read more:
<a href="https://theconversation.com/poll-wrap-coalition-gains-in-first-newspoll-of-2019-but-big-swings-to-labor-in-victorian-seats-nsw-is-tied-110684">Poll wrap: Coalition gains in first Newspoll of 2019, but big swings to Labor in Victorian seats; NSW is tied</a>
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<h2>US government shutdown aftermath</h2>
<p>On January 25, the US <a href="https://en.wikipedia.org/wiki/2018%E2%80%9319_United_States_federal_government_shutdown">government shutdown</a> ended when President Donald Trump accepted a bill that would reopen the government until February 15 without funding for the southern border wall he had demanded. The 35-day shutdown was the longest, beating the previous record of 21 days from 1995-96. Trump has suggested declaring a <a href="https://politicalwire.com/2019/01/27/trump-skeptical-hell-accept-any-deal-on-border-funding/">national emergency</a> if Congress cannot agree to fund the wall by February 15.</p>
<p>In the <a href="https://projects.fivethirtyeight.com/trump-approval-ratings/?ex_cid=rrpromo">FiveThirtyEight poll aggregate</a>, Trump’s ratings fell to 39.3% approve, 56.0% disapprove on January 26. Since then, his ratings have recovered to 40.2% approve, 55.1% disapprove. However, Trump’s ratings among Republicans are well over 80% approve.</p>
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Read more:
<a href="https://theconversation.com/record-us-government-shutdown-harms-trumps-ratings-plus-brexit-chaos-and-australian-essential-poll-110348">Record US government shutdown harms Trump's ratings, plus Brexit chaos and Australian Essential poll</a>
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<p>A <a href="https://www.washingtonpost.com/business/economy/border-talks-at-impasse-as-shutdown-looms-friday-officials-say/2019/02/10/aa8ef08c-2d36-11e9-813a-0ab2f17e305b_story.html?utm_term=.a0d276837498">second shutdown</a> could occur after talks between Democratic and Republican members of Congress broke down. To avert a shutdown, new funding must be passed by Friday (Saturday Melbourne time).</p>
<p>Given strong opposition to Trump in the polls, he needs the US economy to stay strong to have a reasonable chance of re-election in 2020. Despite the January shutdown, the <a href="https://www.bls.gov/news.release/empsit.nr0.htm">economy added 304,000 jobs</a> in that month.</p><img src="https://counter.theconversation.com/content/111523/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adrian Beaumont does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The latest polls show Labor holding a solid lead over the Coalition, while seat polls show that Tony Abbott may struggle to retain his Sydney seat.Adrian Beaumont, Honorary Associate, School of Mathematics and Statistics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1114232019-02-10T19:17:35Z2019-02-10T19:17:35ZWords that matter. What’s a franking credit? What’s dividend imputation? And what’s ‘retiree tax’?<figure><img src="https://images.theconversation.com/files/258075/original/file-20190210-174873-wstlrx.png?ixlib=rb-1.1.0&rect=0%2C0%2C4000%2C2000&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There are words you'll need to understand. But imputation is complex, like the tax system.</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>You’re forgiven for being confused.</p>
<p>Newspapers need to economise on words. Television and radio reporters need to economise on seconds. So they use shorthand: words like “dividend imputation”, “franking credits”, and yes, “retiree tax”.</p>
<p>Which is fine if you already know what they mean, and pretty fine if you don’t, because you probably don’t need to. They speed things along. </p>
<p>Until now. Suddenly, because of their prominence in the upcoming election campaign, we are going to have to know what they mean. We are even going to have to know that one of them doesn’t mean what it seems to mean. The election might depend on it.</p>
<p>So here goes:</p>
<h2>Taxable profits</h2>
<p>If a company’s income exceeds its expenses, it has made a profit, which in ordinary circumstances is taxed at the legislated rate, which for big companies such as Telstra and the big banks is 30 cents in the dollar.</p>
<h2>Dividends</h2>
<p>After the tax is taken out, companies can pay some of what’s left to shareholders as a dividend, one for each share.</p>
<p>Last September Telstra paid shareholders a dividend of 15.5 cents per share. The previous March it was 11 cents.</p>
<h2>Income tax</h2>
<p>Australians pay tax on what they earn, unless the income is classified as not taxable or is below the A$18,200 tax-free threshold. The marginal rate (the rate on extra income) climbs with income, so that anyone earning more than A$180,000 (the top threshold) pays 45 cents on each extra dollar earned.</p>
<p>Dividends are taxable and so are taxed along with other income. </p>
<h2>Dividend imputation</h2>
<p>In 1987 in what he <a href="https://goo.gl/8zMq3t">hailed as a world first</a>, Labor treasurer Paul Keating introduced a rebate for each each tax-paying dividend recipient. </p>
<p>Taken off their tax would be the company tax the company had paid on the part of the profit that had been handed to them as a dividend.</p>
<p>It would greatly reduce the existing bias in the tax system which
taxed interest income once, <a href="https://goo.gl/Dj6Rta">but dividend income twice</a>.</p>
<p>Here’s how it would work at today’s tax rates.</p>
<ul>
<li><p>Jill owns 1,000 Telstra shares </p></li>
<li><p>Over the period of a year she gets dividends of A$265</p></li>
<li><p>To provide them, Telstra made a profit of A$379 on which it paid A$114 tax</p></li>
<li><p>Jill pays tax on the full $379 but gets a credit of A$114 that can be taken off any other tax she owes that year</p></li>
<li><p>As with other tax credits, it can be used to cut Jill’s tax bill as far as zero, but not to turn it negative. It can’t be handed to her in cash.</p></li>
</ul>
<p>As Keating put it, the tax paid at the company level would be <em>imputed</em>, or allocated to shareholders by means of imputation credits.</p>
<p>But not to all of them. Non-resident (overseas) shareholders couldn’t get them, and nor could shareholders whose dividends hadn’t been <em>franked</em>.</p>
<h2>Franking credits</h2>
<p>As Keating explained, the tax credit only applied to the extent to which full Australian company tax had been paid; to the extent to which the dividends had been <a href="https://goo.gl/8zMq3t">franked</a> (stamped) to indicate that tax had been paid.</p>
<p>Not every company pays the full 30 cents in the dollar in every year. Often it is carrying forward previous losses. Only dividends from profits on which full tax had actually been paid were to be marked “fully franked”. Dividends on which tax had been partly paid were to be marked “partly franked”.</p>
<p>Fully franked dividends became sought after, because they brought with them the biggest franking credits. In a useful side effect, dividend imputation encouraged companies that wanted to look after their shareholders to pay full tax.</p>
<h2>Refunds to non taxpayers</h2>
<p>Although the particular Australian design <a href="https://goo.gl/8zMq3t">arguably was a world first</a>, dividend imputation or something similar is not unusual. Many countries have systems in place that to a greater or lesser degree ensure company profits are taxed only once – among them Canada, New Zealand, Chile, Mexico, Malaysia and Singapore, whose system is called “one-tier” tax.</p>
<p>Many that did adopt it later moved away from it, using the money saved to cut headline tax rates; among them <a href="https://www.finsia.com/insights/news/news-article/2016/04/18/dividend-imputation-the-international-experience">Britain, Ireland Germany and France</a>. </p>
<p>What is unusual is what Australia did next. In 2001 after more than a decade of dividend imputation, the Howard government supercharged it, paying out franking credits in cash to shareholders who didn’t have any or enough tax to offset. </p>
<p>From the point of the view of these non-taxpayers, dividend imputation became a negative income tax: instead of them paying the government money, the government paid them money.</p>
<p>As far as is known, it is an enhancement that has not been copied anywhere.</p>
<p>On one hand, it makes sense because it treats non-taxpayers the same as taxpayers by refunding them the same amount of company tax.</p>
<p>On the other hand, it does not make sense because it means that instead of being taxed once (at either the company or the personal level) as was the original intention, company profits can escape tax altogether.</p>
<h2>Untaxed super</h2>
<p>From 2007 the change mattered to many more retirees.</p>
<p>The Howard government’s “<a href="http://simplersuper.treasury.gov.au/documents/decision/html/final_decision_full.asp">Simplified Superannuation</a>” package made super benefits paid from a taxed source (that’s most super benefits outside of the public service) tax free when paid to people aged 60 and over.</p>
<p>A quirk in the wording of the Act went further. Not only did super withdrawals become tax free, they also became no longer included in “taxable income” and so didn’t need to be declared on tax forms.</p>
<p>This meant that many retirees on reasonable super incomes were no longer taxed at reasonable rates on their other income, including income from shares which could be untaxed if it fell below the tax free threshold. </p>
<p>And because of the 2001 decision to send dividend imputation cheques to shareholders who were untaxed, these retirees who suddenly found themselves untaxed also got imputation cheques mailed to them from the government.</p>
<p>Self-managed super funds, whose income is tax exempt in the retirement phase, also got imputation cheques.</p>
<p>In July 2017 the Turnbull government wound back tax free super by placing a limiting it to accounts with less than A$1.6 million. The restriction <a href="https://budget.gov.au/2016-17/content/speech/download/Budget-Speech.pdf">was to hit 1% of super-fund members</a>.</p>
<h2>Labor’s proposal</h2>
<p>Treasury’s <a href="https://apo.org.au/sites/default/files/resource-files/2015/03/apo-nid53883-1222886.pdf">2015 tax discussion paper</a> prepared for the Abbott government referred to “revenue concerns” about dividend imputation cheques.</p>
<p>They cost the budget just A$550 million in the year the Howard government introduced them, but A$5 billion per year by 2018 and were on track to cost A$8 billion. </p>
<p>Labor’s proposal, <a href="https://www.chrisbowen.net/media-releases/a-fairer-tax-system-dividend-imputation-reform/">announced in mid March 2018</a>, was to return the divided imputation system to where it had been before Howard changed it in 2001, and to where it still is elsewhere. Tax credits could be used to eliminate a tax payment but <a href="https://d3n8a8pro7vhmx.cloudfront.net/australianlaborparty/pages/7652/attachments/original/1520827674/180313_Fact_Sheet_Dividend_Imputation_Reform.pdf">not to turn it negative</a>.</p>
<p>Labor allowed exceptions for tax exempt bodies such as charities and universities who would continue to receive imputation cheques alongside dividends.</p>
<h2>Pensioner guarantee</h2>
<p>Two weeks later, in late March, Labor amended its policy by adding a “pensioner guarantee”. Pension and allowance recipients, even part pensioners, <a href="https://www.chrisbowen.net/media-releases/labor-s-plan-to-crack-down-on-tax-loopholes-protect-pensioners-and-pay-for-schools-and-hospitals/">would be exempt from the changes</a> and would continue to receive cash payments.</p>
<p>Also exempt would be self-managed super funds with at least one member who was receiving a government pension or part-pension <a href="https://www.chrisbowen.net/media/183744/180604-updated-factsheet-dividend-imputation.pdf">at the date of Labor’s announcement</a>, 28 March 2018.</p>
<p>The change cost relatively little (the budget saving over the next four years fell to A$10.7 billion from A$11.4 billion) because most of the imputation cheques go to Australians with too much wealth <a href="https://grattan.edu.au/news/the-real-story-of-labors-dividend-imputation-reforms/">to get even a part pension</a>.</p>
<h2>Self Managed Super Funds</h2>
<p>Retail and industry super funds pool their members contributions, and so almost always have tax to reduce, meaning most would be unaffected by the withdrawal of cash credits.</p>
<p>Self Managed funds usually represent just one person, or a couple; their funds aren’t pooled with anyone else’s. This means that in the retirement phase, where fund earnings are untaxed, most do not have enough tax to reduce. So they get imputation cheques, which they would no longer get when Labor’s policy was implemented.</p>
<p>The Parliamentary Budget Office expects some self-managed funds to <a href="https://www.aph.gov.au/%7E/media/05%20About%20Parliament/54%20Parliamentary%20Depts/548%20Parliamentary%20Budget%20Office/Publicly%20released%20costings/Dividend%20imputation%20credit%20refunds%20-%20further%20information%20PDF.pdf">change their investment mix</a> and some owners of self-managed funds to <a href="https://www.aph.gov.au/DocumentStore.ashx?id=c1499bbe-a6b8-4ae5-aa25-4d6b4e60c020&subId=662592">transfer their investments to retail or industry funds</a>.</p>
<h2>Retirement tax</h2>
<p>There is no such thing. The phrase is shorthand for Labor’s proposal to withdraw dividend imputation cheques from dividend recipients who are outside the tax system.</p><img src="https://counter.theconversation.com/content/111423/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If you can understand this, you might just understand the election. Here’s our quick guide to the language of dividend imputation.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1109102019-01-31T09:33:37Z2019-01-31T09:33:37ZGrattan on Friday: What Labor has to fear is the Big Scare<p>Asked this week to nominate Labor’s main problem, one insider said
“time”. As the very remote possibility of a March election drifted
away, the opposition bunkered down for the long wait until May 11 or
18.</p>
<p>Labor has an entrenched lead in the polls and, from its frontbench to
its campaign planning, it is match-ready. But there’s no match at the moment. While some government MPs worry things will get even worse for them as time passes, it can equally be argued that the downside risk for Labor is as great.</p>
<p>This revolves around how effective the scares being rolled out against
the ALP will be.</p>
<p>Though it is generally believed a minor miracle would be needed to
rescue the Morrison government, the Coalition judges the best way to
“save furniture” is to wave the fear flags.</p>
<p>“Scare” campaigns are distasteful but potent: Labor’s Mediscare in
2016 was dishonest but brutally effective.</p>
<p>This is well-ploughed territory. In notes written at the time, then
Liberal federal director Tony Eggleton documents the success of the
Coalition’s 1980 fear-mongering.</p>
<p>The election “was particularly heavy going … the opinion polling was
not encouraging” for the Fraser government, Eggleton wrote. Then
“Labor inadvertently tossed us a lifeline in the final stages of the
campaign.</p>
<p>"One of their spokesmen cost the opposition dearly by raising, albeit
tentatively, the prospect of capital gains taxes on the family home.
We jumped on this and the unpalatable new tax was made the dominant
issue for the last week of the campaign.</p>
<p>"Television and radio messages and full page press advertisements
warned of Labor’s threat to the family home. The day before election
day our pollster Gary Morgan was able to report that for the first
time in the campaign the polls showed us drawing ahead of Labor. He
predicted the possibility at the last minute we had enough momentum to
get over the line”.</p>
<p>Which Malcolm Fraser duly did.</p>
<p>Eggleton also recorded that “the negativity and the tactics were
controversial even among the Liberals but the political hardheads were
of the view that the end justified the means”.</p>
<p>The Morrison government has been stepping up its scares since the
start of the year. Two major targets are Labor’s proposed crackdown on
negative gearing and capital gains and its plan to scrap cash refunds
for franking credits (both cast against the background of Labor
raising taxes). A more general scare is being run claiming a Shorten
government would harm the economy.</p>
<p>The latter illustrates how scare campaigns can be complex and carry
the danger of backfiring.</p>
<p>In a Tuesday speech Scott Morrison claimed a Labor government would lead to a “weaker” economy. He didn’t say it would put Australia into recession, but he highlighted that many workers hadn’t experienced a recession - enough for an Age headline “PM warns recession on way under Labor”. Defence Minister Christopher Pyne declared unequivocally: “There will be a recession in Australia if Labor wins”.</p>
<p>Morrison then found himself on the spot, caught between what he’d said, what he was taken as implying, and what Pyne had asserted.</p>
<p>Amid the confusion, it’s unclear whether this scare would have been a
plus or a minus for the government. It contained another risk too –
any talk of a recession is itself bad for the economy, including for
overseas perceptions of Australia.</p>
<p>The scares over the negative gearing and franking policies are less
complicated, focusing on and magnifying the losers.</p>
<p>Labor first announced its negative gearing revamp last term, when
house prices were rising. Since then, prices in Sydney and Melbourne
have been falling.</p>
<p>This has made it easier for the government to whip up concerns about
the impact of the policy on house values.</p>
<p>The centrality of their house in the thinking of so many Australians
makes this hazardous territory for Labor, however rational its policy.</p>
<p>In the changing circumstances, Labor does have a modest element of
flexibility to play with, because it has not yet announced the start
date.</p>
<p>But to fireproof itself on negative gearing, Labor needs to work harder
on both reassurance (the fact existing negatively-geared properties
would be grandfathered) and selling the policy’s advantages (linking it more strongly to the aspirations of first home buyers).</p>
<p>Anything that affects retirees is another highly sensitive area electorally.</p>
<p>It has been reported that Labor is discounting the political impact of
its franking credits policy because it calculates that many of those hit are already likely to be Liberal voters.</p>
<p>But it would be unwise to be complacent – in the way the Liberals were
for a time about Mediscare in 2016.</p>
<p>And in the hyped climate before an election, any throwaway line can be
weaponised, as shadow treasurer Chris Bowen found this week.</p>
<p>Under questioning about a listener’s view on the franking
issue, Bowen told the ABC: “I say to your listener: if they feel very
strongly about this, if they feel that this is something which should
impact on their vote they are of course perfectly entitled to vote
against us”.</p>
<p>It was a statement of the obvious, although it also came across as
reflecting some frustration.</p>
<p>But the comment took off in the media. “ALP goads seniors: vote
against us”, The Australian headlined its Thursday lead story.
Morrison said the Bowen comment was “arrogant”; Bill Shorten was grilled.</p>
<p>None of the above is to overlook that the government has had another
bad few days, despite Newspoll giving it a small summer lift (from
trailing 45-55% before Christmas to 47-53% now).</p>
<p>Two more ministers, Michael Keenan and Nigel Scullion, have announced
they will leave at the election.</p>
<p>Three high profile independents have emerged in heartland Liberal
seats: Zali Steggall in Warringah; Oliver Yates in Kooyong, and Julia
Banks (Liberal defector now on the crossbench) who plans to run in
Flinders.</p>
<p>All three are highlighting climate change and the fractures in the
Liberal party.</p>
<p>The prospects for Yates and Banks are low but Steggall is a real threat
to Tony Abbott in Warringah.</p>
<p>The government in general remains in bad shape on multiple fronts, and
Scott Morrison often sounds desperate.</p>
<p>The Coalition does have the April 2 budget as an opportunity to
improve its fortunes - on the other hand, if that goes badly it will
be another own goal.</p>
<p>The budget will offer the sugar, the incentives, the bribes to voters.
But it will be the scares that will be the government’s strongest
ammunition. The question will be: how far can these bullets penetrate
Labor’s armour?</p><img src="https://counter.theconversation.com/content/110910/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Though it is generally believed a minor miracle would be needed to rescue the Morrison government, the Coalition judges the best way to “save furniture” is to wave the fear flags.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/594582016-05-18T10:38:16Z2016-05-18T10:38:16ZThe full story on company tax cuts and your hip pocket<p>A long-term plan to cut the company tax rate from 30% to 25% is the centrepiece of the Coalition’s economic plan for jobs and growth. The Coalition maintains the change will boost GDP by more than 1% in the long-term, at a budgetary cost of $48.2 billion over the next 10 years. </p>
<p>But the very Treasury research papers relied on by the Coalition tell a more modest story than the headlines. Using these papers, we show that the net benefit to Australians in the real world will be only about half of the headline benefit, and it will be a long time before we are any better off at all.</p>
<h2>The short story</h2>
<p>The Government has made two claims about the economic impacts of its plan to cut the company tax rate. </p>
<p>On Budget night Treasurer Scott Morrison <a href="http://sjm.ministers.treasury.gov.au/media-release/055-2016/">said</a> that the tax cuts would: </p>
<blockquote>
<p>“… mean higher living standards for Australians and an expected permanent increase in the size of the economy of just over one percent in the long term.”</p>
</blockquote>
<p>Later last week, Prime Minister Malcolm Turnbull <a href="http://www.theaustralian.com.au/federal-election-2016/federal-election-2016-pm-bolstered-by-160bn-reform-promise/news-story/e5fe769c97a196959b6e34e14bcc273d?nk=21bd5293c6c9bf91e73e578611f79538-1463363505&login=1">said</a>:</p>
<blockquote>
<p>“The Treasury estimated last year…that for every dollar of company tax cut, there was four dollars of additional value created in the overall economy.”</p>
</blockquote>
<h2>Sound in theory, but there’s a back story</h2>
<p>In theory, cutting the company tax rate boosts the economy in the long term. All taxes distort choices, and thereby drag on economic activity. Taxes on capital often have especially large economic costs because they discourage investment, which is mobile across borders. By some estimates, roughly <a href="http://onlinelibrary.wiley.com/doi/10.1111/1467-8462.12127/abstract">half of the economic costs</a> of Australian company tax ultimately fall on workers, as lower company profitability leads to lower investment, and therefore lower wages and higher unemployment. </p>
<p>But while the theoretical argument for company tax cuts is straightforward, the real story is more complicated. </p>
<h2>The twist: a tax cut for foreign investors</h2>
<p>The twist in the tale comes from Australia’s system of dividend imputation, or franking credits. The effect of this system is to make the company tax rate for Australian resident shareholders effectively close to zero. In <a href="http://www.copsmodels.com/ftp/workpapr/g-260.pdf">nearly every other country</a>, company profits are taxed twice: companies pay tax, and then individuals also pay income tax on the dividends, albeit often at a discount to full rates of personal income tax. </p>
<p>But in Australia, the shares of Australian residents in company profits are effectively only taxed once. Investors get franking credits for whatever tax a company has paid, and these credits reduce their personal income tax. Consequently, for Australian investors, the company tax rate doesn’t matter much: they effectively pay tax on corporate profits at their personal rate of income tax. </p>
<p>As a result, although Australia has a relatively high headline corporate tax rate compared to our peers, in practice the comparable tax rate is lower – at least for local investors. As a result, many of the international studies about the impact of cutting corporate tax rates are not readily applicable to Australia.</p>
<p>Local shareholders do get one small benefit from cutting corporate tax rates. If companies pay less tax, then they have more to reinvest, so long as the profits are not paid out to shareholders. Yet in practice, <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2016/%7E/media/ACCEB9F5E157439AAE854A9702D1136C.ashx">most profits are paid out</a>. Therefore a company tax cut will generate little change in domestic investment. </p>
<p>By contrast, foreign investors do not benefit from franking credits. They pay tax on corporate profits twice: first at the company tax rate, and then as income tax on the dividends. This means that a cut to the company tax rate provides big benefits to them. </p>
<p>This week <a href="http://www.tai.org.au/sites/defualt/files/P256%20-%20Comapny%20Tax%20Gift%20to%20US%20IRS%20-%20Richardson%20May%202016.pdf">The Australia Institute</a> pointed out that foreign investors from the United States and other countries that have tax treaties with Australia may not benefit from the company tax cut, because their home governments will collect the gains from any cut to Australia company tax as additional company tax. Yet this would only occur when foreign firms repatriate profits earned in Australia to the home country. </p>
<p>The big reductions in net tax revenue – and therefore the large benefits to companies – are expected when the corporate tax rate is cut from 30% to 25% between 2022 and 2027 for larger companies, including the bulk of businesses that are foreign-owned. </p>
<p>The headline from the <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2016/Budget%20Modelling/Downloads/PDF/160503_Economy-wide%20modelling.ashx">Treasury modelling for the 2016-17 Budget</a> is that this cut will ultimately increase GDP by up to 1.2% meaning larger foreign companies are attracted to invest more in Australia. The finding is based on work contained in a <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2016/working-paper-2016-02">Treasury research paper</a> that modelled the long-term impact of a company tax cut. </p>
<h2>Activity is not income</h2>
<p>However, it is a mistake to assume that all the increase in economic activity will make Australians better off. We often use Gross Domestic Product – the sum of all economic activity – as a short-hand measure for prosperity. But when the benefits disproportionately flow to non-residents, GDP can be misleading. It’s much better to look at Gross National Income (GNI), which measures the increase in the resources available to resident Australians. </p>
<p>Treasury expects that cutting corporate tax rates to 25% will only increase the incomes of Australians – GNI – by 0.8%. In other words, about a third of the increase in GDP flows out of the country to foreigners as they pay less tax in Australia. And because most of the additional economic activity is financed by foreigners, the profits on much of the additional activity will also tend to flow out of Australia.</p>
<h2>You don’t get something for nothing</h2>
<p>Yet even this increase in GNI of 0.8% is not the best estimate of the improvement in living standards Australians can expect from the Government’s company tax plan. If company taxes are lower, other taxes have to be higher, all other things being equal. In the modelling discussed so far, Treasury first assumes that these revenues can be collected by a fantasy tax that imposes no costs on the economy. </p>
<p>But that’s not what happens in the real world. So the Treasury research paper also models the scenario in which personal income taxes rise to offset the reduced company tax revenue. On this more realistic assumption, Treasury estimates that GNI will increase by just 0.6% in the long term, or roughly $10 billion a year in today’s dollars. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<h2>Other wrinkles in the story</h2>
<p>Even this more modest Treasury figure may well over-estimate the long-term boost to GNI. In the real world, progressive income taxes impose <a href="http://taxreview.treasury.gov.au/content/html/commissioned_work/downloads/kpmg_econtech_efficiency%20of%20taxes_final_report.pdf">higher costs</a> than the hike to a hypothetical flat-rate personal income tax that Treasury modelled. Companies may also not increase investment as much as Treasury expects, and those firms that are part of oligopolies in Australia may not increase wages by as much as Treasury assumes. </p>
<p>While these are reasons to expect that the Treasury modelling overestimates the economic benefits of a company tax cut, they are offset by some more conservative assumptions. Treasury believes that tax cuts modestly change how much firms shift profits overseas; it may overstate how much tax cuts flow into additional profits rather than higher wages in those industries that it does recognise as oligopolies; and it may discount the benefits of investors making less distorted choices between debt and equity funding. </p>
<h2>The verdict on the first claim</h2>
<p>The bottom line is that, on Treasury’s own modelling, a corporate tax cut will increase Australian incomes in the long term by up to 0.6%. The Treasury research paper doesn’t commit itself to a timeframe, but it cites other work that expects the economic benefits of company tax cuts to take 20 years to bear fruit, with half the benefit in 10 years. Given that the important (and expensive) part of the corporate tax cuts only starts to take effect from 2022, Australia will be waiting 25 years for a 0.6% increase in incomes.</p>
<p>This economic benefit needs to be seen in context. If Australian per capita GDP and GNI increase at 1.5% a year (as the budget papers routinely assume), then over 25 years, incomes will rise by 45.1%. Corporate tax cuts mean that instead, incomes will rise by 45.7% – or perhaps a bit less. It may still be worth doing, but it’s not a plot twist that dramatically changes Australia’s story.</p>
<p><a href="http://www.tai.org.au/content/company-tax-cuts-report-shows-lack-evidence-%E2%80%98growth-dividend%E2%80%99">Others</a> claim that in the past, company tax cuts have had no measurable effect on the economy. This is <a href="../../../../../../Library/Caches/TemporaryItems/Outlook%20Temp/cis%20corporate%20tax%20cut">disputed</a> – there may well be a link between corporate tax cuts and economic growth. But it’s inevitably hard to see in practice because on Treasury’s own modelling the economic effect of company tax cuts is small relative to other changes.</p>
<h2>Not four-to-one, more like dollar for dollar</h2>
<p>This brings us to the Government’s second claim. Late last week, Mr. Turnbull said that each dollar in company tax revenue cut would deliver an extra four dollars in GDP.</p>
<p>His claim appears to be drawn from an <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2015/working-paper-2015-01">earlier</a> 2015 Treasury research paper that modelled the economic impact of major Australian taxes, including company tax. The more <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2016/working-paper-2016-02">recent</a> Treasury working paper, released in Budget week, implies a slightly larger $4.30 increase to GDP from each $1 in revenue cut.</p>
<p>But again this misses a big part of the story. </p>
<p>First, this claim is about GDP, and therefore includes the disproportionate increase in the income of foreigners. Our analysis of the Treasury modelling shows that the increase to Australian incomes, or GNI, is only $2.80 per dollar of revenue lost from a corporate tax cut. </p>
<p>Second, when corporate tax is replaced by a still hypothetical but marginally more realistic flat rate income tax – rather than a complete fantasy tax that has no impact on the economy – the increase to Australian incomes is less again: only $1.80 per dollar of revenue lost. </p>
<p>Third, the Prime Minister has framed the boost to the economy in terms of the long-term increase to GDP per dollar of company tax cut. Treasury calculates the revenue “dollar” lost after considering the additional tax revenue that the government hopes to collect from all taxes in twenty years time as incomes rise because of greater investment. </p>
<p><a href="http://www.theaustralian.com.au/federal-election-2016/federal-election-2016-pm-bolstered-by-160bn-reform-promise/news-story/e5fe769c97a196959b6e34e14bcc273d?nk=21bd5293c6c9bf91e73e578611f79538-1463363505&login=1">Many people</a> would interpret the Prime Minister’s statement to compare the ultimate benefit per dollar of tax revenue given up <em>in the shorter term</em>. On this basis, the increase to Australian incomes in the long term is only $1.20 for every dollar given up in the short term as a result of corporate tax cuts.</p>
<p>This story ends the same way. Corporate tax cuts may be worth doing, but the outcome is unlikely to set pulses racing. </p>
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<img alt="" src="https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<h2>The journey matters</h2>
<p>So far, as the Treasury research paper does, we’ve focused on the long-term economic boost from a company tax cut once the economy has fully adjusted. But the journey to get there also matters.</p>
<p>For a decade, a cut to corporate taxes will reduce national income. Foreigners will pay less tax on the profits from their existing investments in Australia, reducing Australian incomes. Foreigners own about 20% of all capital in the economy, so it’s a big windfall gain for them. We estimate that when a 5 percentage point tax cut for big business is first implemented, national incomes will be reduced by about 0.5%, as a result of the immediate loss in company tax revenues formerly paid by foreign investors.</p>
<p>The benefits to Australians from a corporate tax cut only accumulate slowly as foreigners make additional investments. Treasury cites a paper that estimates that the benefits of corporate tax cuts take 20 years to flow through. Assuming that these benefits increase at a constant rate, Australian income will only be larger than otherwise after about 10 years. </p>
<p>Of course, the upfront costs of a company tax cut over the first decade must be offset against the long-term gains. On our estimates, the loss of income incurred over the first decade will only be offset by higher incomes after about 19 years. If Australians want the modest economic benefits of a corporate tax cut, they will be waiting a long time.</p>
<h2>The moral of the story</h2>
<p>Company tax cuts are not a knight in shining armour to save the Australian economy. On the basis of the modelling that the government uses to support its case, corporate tax cuts can make a modest contribution, and then over the very long term. That story won’t sell as many copies. Truth, on this occasion, is duller than fiction.</p><img src="https://counter.theconversation.com/content/59458/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and Grattan uses the income to pursue its activities.</span></em></p><p class="fine-print"><em><span>Brendan Coates does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Two government claims about the apparent boost to the economy of company tax are put to the test.John Daley, Chief Executive Officer, Grattan InstituteBrendan Coates, Fellow, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/590692016-05-11T20:06:55Z2016-05-11T20:06:55Z‘Jobs and growth’ and deja vu: reprising a failed American experiment<p>During his budget speech Treasurer Scott Morrison <a href="http://www.businessinsider.com.au/heres-how-many-times-scott-morrisons-budget-speech-used-the-catchphrase-jobs-and-growth-2016-5">said the phrase “jobs and growth” 13 times</a>. It seems he is not a superstitious man. But <a href="https://en.wikipedia.org/wiki/Triskaidekaphobia">Triskaidekaphobes</a> were not the only ones left with a queer feeling after his speech. Students of the history of tax reform experienced a strange sense of déjà vu.</p>
<p>In 2003 US President George W Bush campaigned on a <a href="http://edition.cnn.com/2003/ALLPOLITICS/01/07/bush.speech/">10-year ‘economic plan’ for “jobs and growth”</a> by cutting taxes. The centrepiece was the “<a href="https://www.congress.gov/bill/108th-congress/house-bill/2">Jobs and Growth Tax Relief Reconciliation Act</a>”. It was the second part of the infamous <a href="https://en.wikipedia.org/wiki/Bush_tax_cuts">Bush Tax Cuts</a>, which began in 2001 and have dogged America’s finances ever since. </p>
<p>The <a href="https://georgewbush-whitehouse.archives.gov/news/releases/2003/05/20030528-9.html">rationale President Bush gave for those tax cuts</a> needs little more than a nationality swap to stand in for Treasurer Scott Morrison. </p>
<blockquote>
<p>“We’re helping small business owners looking to grow and to create more new jobs… By ensuring that [Australians] have more to spend, to save, and to invest, this [budget] is adding fuel to an economic recovery. We have taken aggressive action to strengthen the foundation of our economy so that every [Australian] who wants to work will be able to find a job.”</p>
</blockquote>
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<img alt="" src="https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">White House Archives.</span>
<span class="attribution"><span class="source">Paul Morse/Whitehouse Photo</span></span>
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<p>The US tax system is notoriously complex. Comparisons between it and Australia’s are fraught. Further, the Treasurer’s tax cuts are not as sweeping as President Bush’s. Yet, striking similarities remain. </p>
<p>Both are tax cuts which will <a href="http://www.abc.net.au/news/2016-05-03/rich-benefit-most-from-scott-morrison's-tax-reforms/7380660">overwhelmingly benefit the well-off</a>. Both aim to increase “jobs and growth” by encouraging investment. Both aim to <a href="http://www.smh.com.au/entertainment/tv-and-radio/qa-recap-audience-member-delivers-an-early-campaign-reminder-to-all-politicians-20160510-goqb4v.html">“grow the pie”</a>; that is, spur economic growth so that taking a smaller proportion of tax will still generate a larger tax base, in real terms.</p>
<h2>The consequences – ballooning federal debt</h2>
<p>In light of the similarities, it is worth considering how effective the Bush Tax Cuts were. In short, not at all.</p>
<p>In 2001 Conservative think tank, the Heritage Foundation, calculated that the first part of the Bush Tax Cuts alone would <a href="http://origin.heritage.org/Research/Reports/2001/04/The-Economic-Impact-of-President-Bushs-Tax-Relief-Plan">eliminate US national debt by 2010</a>. In fact, US national debt more than doubled in that time; <a href="https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm">from $5.8 trillion to $13.5 trillion</a>. </p>
<p>The non-partisan <a href="https://www.cbo.gov/sites/default/files/111th-congress-2009-2010/reports/01-26-outlook.pdf">Congressional Budget Office</a> noted that US Federal revenue collapsed, from 20% of GDP in 2000 to 14.6% in 2009, at the end of Bush’s term. Unemployment doubled; from 4% to 8% and rising in that same period.</p>
<p>These results were a body blow for political advocates of “supply-side doctrine” or “trickle-down economics”. It is unsurprising that politicians were – and remain – excited by the idea that government can raise more money simply by lowering taxes. Sadly, many very good ideas have to be abandoned because they don’t work in practice.</p>
<h2>Same, but different</h2>
<p>There is one key point of difference between the American experience and Australia’s. Unlike the United States, Australia has a dividend imputation system. It is a complicated system, often not well understood. Morrison has not taken pains to explain it. Indeed, his statements on the effect of these tax cuts are apt to confuse. Some have accused the Treasurer of <a href="http://www.abc.net.au/news/2016-05-03/budget-2016-scott-morrison's-tax-plan-is-a-big-con-here's-why/7380830">“exploiting widespread ignorance of how the company tax system actually works”</a>.</p>
<p>Dividend imputation means the tax paid by a company is credited to its shareholders. Thus, the tax individual shareholders pay on profits from their investments in companies is not determined by the company tax rates. The proposed cut to the company tax rate - from 30% to 25% - will likely have little impact on Australian investors.</p>
<h2>Why this difference won’t end up helping individual investors</h2>
<p>Imagine Susan, an investor who earns an income from salary of $85,000 who also owns some shares in a company. The company makes a profit, and Susan’s share of that profit is $1,000. </p>
<p>The company tax rate is currently 30%. So the company pays $300 of Susan’s $1,000 share of the profit to the Australian Tax Office and gives the remaining $700 to Susan. Dividend imputation means that Susan also receives franking credits worth the value paid to the ATO - $300. </p>
<p>When it comes time for Susan to pay tax, the Tax Office adds up the value of the dividend <em>and</em> the franking credits then adds the total to her income for the year. Susan is then assessed tax on her whole income - $85,000 in salary, plus $1,000 made up of the $700 dividend and $300 of franking credits.</p>
<p>Since Susan pays 37 cents on every dollar she earns over $80,000, the effect of adding $1,000 to her salary is that she owes the tax office an extra $370 in taxes. The tax office deducts the $300 in franking credits that they already hold, leaving Susan owing a total of only $70 to the Tax Office. Overall, she has received $630 after tax from her investment ($700 in dividends, minus $370 income tax, plus $300 franking credits).</p>
<p>The value of her investment after tax is determined by her income tax rate, not the company tax rate. In practice, the rate of company tax has no impact on the amount of tax Susan pays; she is always assessed at her marginal tax rate.</p>
<p>In the above scenario, let’s imagine the company tax rate drops to 25%. The company has made $1,000 in profit. Now it pays only $250 to the ATO. It distributes the remaining $750 to Susan.</p>
<p>At this stage it looks as though Susan is in front. She has received $750 in dividends, rather than $700 – an extra $50. But we need to factor in franking credits. Under the lower rate of company tax, Susan only receives $250 in franking credits. </p>
<p>And she is still assessed income tax on both the dividend and the franking credits – the full $1000. Her marginal tax rate has not changed, so she still owes $370 on that income. She may deduct the $250 in franking credits, leaving her owing the tax office a remainder of $120. </p>
<p>The extra $50 she received in dividends is offset by the $50 less she receives in franking credits. Overall, her position has not changed; she still receives $630 after tax from her investment, as she would if the company tax rate had remained at 30%</p>
<p>It is the rate of income tax, not company tax, that matters for the individual taxpayer. It is unclear how a change to the company tax rate that will not make investing more attractive to individuals, from a tax perspective, can encourage ‘jobs and growth’.</p>
<h2>Who does benefit? Foreign investors</h2>
<p>So who does benefit from a cut to the company tax rate? The answer depends on the complexity of your tax structures. But there is one clear winner; foreign investors. Foreign investors do not receive franking credits, because they do not pay income tax in Australia. So, any cut to the corporate tax rate has an immediate benefit for foreign investors. </p>
<p>The changes to the company tax rate will make little difference to Australian investors. However, those whose investments are managed from an off-shore company - say, one incorporated and paying tax in the Cayman Islands - stand to benefit significantly. </p>
<p>Which might well give one a strange sense of déjà vu…</p><img src="https://counter.theconversation.com/content/59069/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tomas Fitzgerald has received funding from the WA Bar Association. He is a member of the NTEU and WA Labor.</span></em></p>In 2003, US President George W. Bush campaigned on a 10-year ‘economic plan’ for “jobs and growth”. If it sounds familiar, it should.Tomas Fitzgerald, Senior Lecturer, Law, University of Notre Dame AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/397882015-04-08T05:12:45Z2015-04-08T05:12:45ZExtending dividend benefits to foreign investors may address competition concerns<p>The Federal Government has floated the idea of lowering the corporate tax rate – arguing the current rate of 30% is not internationally competitive. The rationale is that globalisation makes capital perfectly mobile and the marginal non-resident investor in Australian companies will go where corporate tax rates are lowest.</p>
<p>At the same time, the government’s <a href="http://bettertax.gov.au/publications/discussion-paper/">Re:Think Tax Discussion Paper</a> identifies some problems with Australia’s dividend imputation system (albeit recognising some of its advantages). Under the current system, franking credits provide little or no benefit to non-resident investors in Australian companies - because the franked portion of a dividend paid to non-residents is exempt from Australian dividend withholding tax but does not generate a tax offset for them.</p>
<p>The relatively high corporate tax rate is said to deter foreign investors while the dividend imputation system does nothing to attract them.</p>
<p>Cutting the corporate tax rate across the board would be very expensive, although the cost may dissipate over time if the rate cut produced greater economic activity. Importantly the cut in the rate would apply to all companies, not just those with non-resident shareholders. The revenue cost would be mitigated by a change back to a classical system of corporate-shareholder taxation – where corporate profits would be taxed twice.</p>
<p>For closely-held domestic companies a cut in the rate would encourage companies to retain profits as would a move away from dividend imputation towards a classical system or other forms of corporate-shareholder taxation. Again the revenue cost would be mitigated if we remove the 50% discount on capital gains, but this would also encourage profit retention unless capital gains were taxed more heavily than ordinary gains to compensate for the advantages of deferral.</p>
<p>If the problem lies in having a competitive tax rate for non-resident investors in Australian companies, then why not have a solution targeted at those investors?</p>
<p>Why don’t we extend tax offsets on franked dividends to non-resident investors? The technical reason is that, for many resident taxpayers, tax offsets on franked dividends are refundable.</p>
<p>The prospect of giving refundable tax offsets to non-resident shareholders probably does not have a lot of political appeal – but it would be a less expensive way of giving these investors in Australian companies an internationally competitive corporate tax rate.</p>
<p>The extension of franking credits to non-resident shareholders would reduce the effective Australian corporate tax rate for non-resident investors in Australian companies in a targeted way.</p>
<p>Australia currently imposes withholding tax on the unfranked portion of dividends paid to non-resident investors. Where the non-resident comes from a country with which Australia does not have a double tax treaty (DTA) the rate is 30%. Where the non-resident comes from a country with which Australia has a DTA the rate can vary between 0%, 5% and 15% depending on the level of investment and the particular DTA. </p>
<p>Currently Australia exempts the franked portion of a dividend from withholding tax.</p>
<p>Where the non-resident shareholder resides in a DTA country Australia could provide a targeted reduction in the effective Australian corporate tax rate that applied to the non-resident shareholder by imposing withholding tax on the franked portion of the dividend while allowing a proportion of the franking credit to generate a refundable tax offset for the shareholder.</p>
<p>Because of withholding tax rates in DTAs, to produce an even effective Australian corporate tax rate for investors from all DTA countries the proportion of the tax offset allowed would need to fall with the withholding tax rate.</p>
<p>For non DTA countries, we should continue our present policy of exempting the franked portion of the dividend from withholding tax and not allowing tax offsets. Generally we do not have DTAs with very low taxed countries or with countries that are not significant trading and investment partners.</p>
<p>If the Australian corporate rate remained at 30% extending tax offsets for franking credits to non-resident shareholders tapering down as the level of withholding tax decreased would reduce their effective Australian corporate tax rate.</p>
<p>For example, to produce a very competitive 15% effective corporate rate for non-resident investors Australia could, while maintaining its corporate rate at 30%, provide a full tax offset of where a 15% withholding tax applied, a 2/3 credit where 5% withholding tax applied and a ½ credit where a 0% withholding tax applied.</p>
<p>In all cases the effective Australian corporate tax rate for a non-resident shareholder would be a very competitive 15% at a lower revenue cost than under an across the board cut in the corporate tax rate and the benefits of dividend imputation would be preserved for resident shareholders.</p><img src="https://counter.theconversation.com/content/39788/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Taylor has previously worked as a paid consultant to Commonwealth of Australia, Department of the Treasury. He owns shares in Commonwealth Bank of Australia Ltd and Insurance Australia Group Ltd..</span></em></p>If our dividend imputation system makes it unattractive for non-resident investors in Australian companies, why not extend tax offsets on franked dividends to them?John Taylor, Professor, School of Taxation and Business Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/151362013-06-25T21:00:38Z2013-06-25T21:00:38ZA frank debate - dividend washing and double dipping<figure><img src="https://images.theconversation.com/files/25934/original/9yzgv2q2-1371712844.jpg?ixlib=rb-1.1.0&rect=0%2C2%2C1000%2C850&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Dividend washing enables some domestic investors to essentially gain a dividend “twice”.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>There is currently considerable interest in the practice of “dividend washing”. This refers to the practice of investors being able to trade shares cum-dividend for a period after the ex-dividend date has passed, under special arrangements provided by the ASX. </p>
<p>It is suggested that some investors are “double dipping” into the pool of franking credits distributed with dividends, by selling shares they hold once they go ex-dividend and then buying replacement new shares in that special trading, which they receive cum-dividend. </p>
<p>They get, for example, dividends (and attached franking credits) on 2000 shares despite only owning 1000 shares at any point in time. If foreign investors are selling the shares, there is a cost to tax revenue because they would have been unable to use the franking credits attached to the dividend.</p>
<p>The issue of dividend washing can be addressed in three steps. First, should the practice be permitted? Second, why might cum-dividend trading be allowed after the ex-dividend date? Third, if the rationale for allowing such trading reflects current institutional arrangements, is there some simple adjustment to those arrangements, which is a superior solution to others proposed?</p>
<p>It is clear that dividend washing is at variance with the objective of preventing trading in imputation credits, which transfers those credits from those unable to use the tax benefits (foreign investors) to domestic investors. Dividend washing also enables some domestic investors to essentially gain a dividend “twice” by selling their current stock holding ex-div and then buying cum-div in that period of trading permitted by the ASX after the ex-div date. </p>
<p>But this is only a cost to government tax revenue if it increases the total amount of sales of cum-dividend stock by foreigners. It may be simply a redistribution of the timing of cum-div sales by foreigners from before the ex-div date to this later period. That is an empirical question.</p>
<p>Cum-dividend trading after the ex-dividend date arises because of the institutional arrangements associated with trading of equity options on the ASX. Specifically: </p>
<ul>
<li> writers of call options are required to deliver stocks if
options are exercised against them </li>
<li> buyers of call options might exercise an option on the last<br>
cum-dividend day</li>
<li> the allocation of exercised options against writers (in the event that less
than 100% of outstanding options are exercised) is done randomly because of
novation</li>
<li> that process occurs overnight, so option writers will not know they
have been exercised against and need to deliver stocks until the
ex-dividend day. </li>
</ul>
<p>Consequently, the stocks they are required to buy to deliver (if they are not hedged by already holding such stocks), will not have dividends attached, whereas the option holder is entitled to receive stocks with the dividend attached. By allowing a short period of cum-dividend trading after the ex-dividend date, this problem is resolved – but creates the opportunity for dividend-washing transactions unrelated to option trading.</p>
<p>The first point to note, is that the reason for allowing cum-dividend trading is unrelated to the issue of franking-credit use. If the same institutional arrangements for options trading and settlement existed in a market without dividend imputation, the same issue would apply. The option writer would still face the problem of being exercised against and not being able to buy shares with the dividend attached.</p>
<p>Therefore, there are two pieces of empirical evidence that are worth examining. First, is there any evidence of cum-dividend trading being greater for stocks paying franked dividends than stocks paying unfranked dividends in Australia? If so, this may suggest that cum-dividend trading is being requested primarily for trading of franking credits. Second, do similar arrangements for cum-dividend trading apply in overseas markets? If not, perhaps there are alternative institutional arrangements for options trading that obviate the need for allowing cum-dividend trading.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/25955/original/mtfw3md2-1371776222.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/25955/original/mtfw3md2-1371776222.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/25955/original/mtfw3md2-1371776222.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/25955/original/mtfw3md2-1371776222.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/25955/original/mtfw3md2-1371776222.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/25955/original/mtfw3md2-1371776222.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/25955/original/mtfw3md2-1371776222.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Cum-dividend trading after the ex-dividend date occurs under ASX special arrangements.</span>
<span class="attribution"><span class="source">Image source from www.shutterstock.com</span></span>
</figcaption>
</figure>
<p>What other institutional arrangements for options trading could be considered, which would obviate the need for cum-dividend trading?</p>
<p>One arrangement would be to allow settlement of options contracts in cash rather than requiring physical delivery. Then an option writer exercised against would be liable to pay the cash amount equal to the difference between the strike price and market price at the time of exercise, plus the grossed-up value of the dividend. (The grossed-up amount is the cash dividend plus the amount of the franking credit.) They would not have to buy stock cum-dividend.</p>
<p>An alternative approach would be to rewrite the option contract terms so the option holder would be entitled to receive the share cum-dividend only if the exercise occurred one or two days prior to the last cum-dividend date. This would provide the option writer with time to purchase the stock cum-dividend for delivery. Traders would need to know which was the key date one or two days prior to the last cum-dividend date and this may make arrangements for option trading slightly more complicated. However, option traders are expected to be financially sophisticated enough that this should not be a major issue.</p>
<p>Alternatively, if physical delivery is the only option, and a rewriting of the exercise conditions is not made, it would be possible to make a simple amendment to the tax laws to prevent dividend washing. Specifically, there would be a requirement that purchasers of shares cum-dividend after the ex-dividend date are not entitled to claim the franking credits. They would be able to deliver the shares cum dividend, inclusive of franking credits, in settlement of option obligations to option holders.</p>
<p>That approach might appear to give rise to dividend-washing opportunities by an investor buying both stock and call options in the same stock at least 45 days prior to the ex-dividend day. The strategy would be to exercise the options on the last cum-dividend day (prior to the ex-div day) and sell the stock already held on the ex-div day (using the proceeds to make the payment required on exercise of the call option). The investor would appear to be entitled to receive the dividend and franking credits on the stock and would then also receive the dividend and franking credits on the stock received from exercise of the call options. </p>
<p>However, the last-in-first-out rule would preclude this, as long as the date of purchase for the shares due from the call option is the date-of-option exercise (rather than delivery date). Those shares would then be deemed the ones sold on the ex-dividend day, and thus held for less than 45 days, precluding use of the franking credits attached to the dividend.</p>
<p>To the extent that particular institutional arrangements for ASX option trading give rise to the problem of dividend washing, it is perhaps appropriate to examine whether those arrangements can be changed in a simple manner.</p><img src="https://counter.theconversation.com/content/15136/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>I am a shareholder in the ASX.</span></em></p>There is currently considerable interest in the practice of “dividend washing”. This refers to the practice of investors being able to trade shares cum-dividend for a period after the ex-dividend date…Kevin Davis, Research Director, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.