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Australia’s company tax ‘burden’ is just a myth

Treasurer Swan could reduce the headline corporate tax rate from its current 30% rate to just over 15%, with virtually no consequences for government tax revenue with one simple piece of legislation: simply…

Does Australia’s company tax rate place a significant impost on local businesses? shutterstock

Treasurer Swan could reduce the headline corporate tax rate from its current 30% rate to just over 15%, with virtually no consequences for government tax revenue with one simple piece of legislation: simply abolish the dividend imputation tax system.

Currently, around half of company tax paid is offset by franking (tax) credits received by Australian shareholders in companies. Companies pay out around 70% of after tax earnings as franked dividends and around 80% of the attached franking credits are used by shareholders to reduce their tax payable.

If imputation were abolished, the company tax rate cut to around 16% ,and if (a big if) companies paid out the increase in after tax earnings as increased dividends, the following effects would occur.

First, the headline corporate tax rate would be reduced – hooray! Second, shareholders would end up with the same after tax dividend income. Third, there would be minimal effects on budget tax revenues – other than some timing issues, and a relabelling of some corporate tax as personal/investor tax.

But the message from that is not that imputation should be abolished. Rather, it is that business leaders and commentators simply refuse to acknowledge that the tax paid at the company level is not really all company tax.

The 30% headline rate is not at all comparable with similar rates in other countries with classical, or non-integrated, tax systems where company income distributed as dividends is taxed twice. If an appropriate comparison is made, which recognises that company tax is really a withholding of investor level tax, our average “company” tax rate is closer to a classical system rate of 15%.

To illustrate that our company tax rate is not high by international standards, consider the total government tax take on $100 of company income if the company has a 100 per cent payout ratio. Under the imputation system if the shareholder is a resident on a 45% rate, total tax paid under our imputation tax system would be $45.

Under the classical tax system, company tax of $30 would be paid and the dividend payment of $70 would lead to a further $31.50 of tax for a shareholder on a 45 per cent tax rate, for a total tax take of $61.50.

Now while that is a hypothetical comparison which ignores overseas tax rate levels and other tax system features, it does indicate that focusing on the 30% “headline” rate can lead to bad policy. And labelling the tax withheld as “corporate” tax rather than as a “withholding” tax on behalf of shareholders creates a misleading image when international comparisons are made.

Why do our business leaders not acknowledge the illusory nature of the 30% headline rate? One reason may be that for some companies the headline rate is actually the true rate. For foreign shareholders, franking (tax) credits cannot be used, so that foreign companies may perceive Australia as having a higher than average corporate tax rate.

And for Australian companies with foreign shareholders, a cut in the headline rate would be advantageous to those shareholders. Whether that loss of tax revenue, but increased interest in Australian equity investments by foreigners would be a good outcome for Australia is an open question.

Another reason why business leaders have this myopic perspective may be that the imputation tax system induces them to act in ways which they would not otherwise do, but which are actually in the best interests of shareholders.

Imputation removes tax incentives for excessive leverage – at least for companies which are profitable. It also induces high dividend payout rates, thus reducing the ability of hubristic managers to retain earnings and invest in pet projects without having to face the discipline of raising outside funds.

Yes, we could almost halve the headline company tax rate without budgetary costs by abolishing imputation. But that is not an obviously good strategy – and would create significant angst among investors who have structured their investments around capture of franking credits.

Far simpler that we recognise the truth that a 30% headline corporate tax rate under dividend imputation is actually nowhere near that large an impost on business.

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8 Comments sorted by

  1. John C Smith

    Auditor

    Yes it is only the foreigners who will get a benefit from lowering the Copnay tax rates, be it the head or tail rate.

    If a company makes a profit of $100/per shareholde, it pays $ 30 tax to the govenment. Shareholder/resident taxpayer will declare $100 though you get $70 from the company. and claim $ 30 tax off set against his tax payable. I think you get the $ 30refund (tax offset) from the Taxperson (ATO) if your tax rate is zero etc.

    If the shareholder is a non resident he does not get a…

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  2. Robert Tony Brklje
    Robert Tony Brklje is a Friend of The Conversation.

    retired

    A lovely bit of spin that completely ignores the reality of the tax cheating rich and greedy. People who dump their personal income into corporations along with their, private jets, mansions, super cars and mega-yachts and thanks to disingenuous people like you, after cheating with tax deductions on all of them as a bonus, they will get to pay half the tax rate of the average worker. My aren't you generous.
    So the reason why the company tax rate must be the equivalent of the highest personal income tax rate because people cheat and I'll bet a good chunk of your income is buried in a company and offset by some pretty wild personal use tax deductions, like the holidays overseas 'er' tax deductible research trips and some really funky GST shenanigans going on too I'll bet.
    Most Australians have no idea at all about how the right wing rich and greedy just cheat and cheat and cheat. The never ever stop trying to corrupt the system in their favour, psychopathy knows no limits.

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    1. Trevor S

      Jack of all Trades

      In reply to Robert Tony Brklje

      Sure, you get the super wealthy being able to doge tax but that's a fall out of the overly complicated tax system and their ability to spend large amounts to find the loop holes. For most SME's owners (I used to be one) the only ways to get money out is via a salary or a dividend and they both mean you still have to pay your full rate of personal tax, you can just use dividend imputation to avoid being double taxed.

      Of course there are a lot of things you can do, but they mostly revolve around…

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  3. Michael Shand

    Software Tester

    Great Article, its funny how giving multinational corporations tax breaks doesnt actually help australians huh...who would of thought

    Whenever corporations cry about taxes it makes me smile....I mean these same companies have little struggle finding money when it comes to lobbying or politic donations but when it comes to paying tax, ohhhh ahhhhh, the corporation claims to be struggling, uncertain, etc

    Corporations do not create jobs, tax cuts for corporations does not create jobs the only thing that will make a corporation hire someone is demand, demand from the middle class

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  4. Chris O'Neill

    Retired Way Before 70

    Sometimes there are proposals to reduce the company tax rate in a "revenue neutral" way by abolishing some tax deductions. Net profit after tax and hence dividends would remain the same over all industries in aggregate. The only difference to Australian shareholders would be a lower rate of imputation credits so these proposals would just make Australian shareholders worse off.

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  5. Andrew Smith

    Education Consultant at Australian & International Education Centre

    The headline corporate tax rate of 30% would be very alarming to those offshore genuinely wishing to invest in &/or start up a viable business (versus shareholder investment) in Australia (in addition to local taxes and salary costs), as opposed to what is on offer from other more competitive countries.

    However, any sniff of disadvantage to baby boomers' and oldies' share portfolio nest eggs would be political suicide.......

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