by Geoff Wilson
Labor’s proposal to remove cash refunds for excess tax paid on dividends would adversely affect all Australians through a series of knock-on effects that they cannot foresee or will not admit. Australia’s dividend imputation system removes double taxation, promotes economic stability by reducing cyclicality, encourages Australian investment, which creates jobs and results in tax payments.
Labor’s proposal would impact the entire economy and cause suffering to low-income earners and modest retirees who have worked and saved under a fair system that should be respected and safeguarded. This policy proposal is discriminatory, poorly timed and doomed to fail; it should be abandoned to protect the living standards of all Australians.
The reforms of Keating and Howard created a system of taxation where shareholders of Australian companies are taxed on dividend income at their marginal rate. Shareholders who attract a lower tax rate than the 30 per cent company rate – low-income earners and retirees – receive a refund on tax paid. This is as much a “rort’ as a salaried employee receiving a tax refund on excess income tax they have paid.
Individuals that attract a higher income tax rate than 30 per cent pay the difference between the company rate and their marginal rate. Under Labor’s proposal, these high-income earners would continue to receive the full benefit of franking, while those on a lower taxable income would not.
This policy will not see rich Australians pay more tax – it is a blunt instrument that would reintroduce double taxation arbitrarily in a regressive manner. The discrimination continues by creating a two-tier superannuation system where industry superannuation funds can claim cash refunds but SMSFs cannot.
Labor recognises the harshness of its policy, therefore individuals receiving the Age Pension before March 28, 2018 are exempt. I have been in touch with hundreds of individuals who fall between the cracks of this policy. If it were not tragic, this “fix” would be laughable.
Thanks to Keating, all working Australians are shareholders of Australian companies either directly or through their superannuation funds, so this policy would impact the wealth of all Australians. This means that all Australians, young and old, would receive lower returns on their savings and superannuation payouts when they retire.
Rice Warner estimates that 25 per cent of Australian shares held in SMSFs would be sold down due to this policy. Looking at the big four banks, which make up 21 per cent of the S&P/ASX All Ordinaries Index, retail investors comprise 43 to 53 per cent of their share registries by value. Labor’s changes could see $36 billion wiped from the value of Australia’s big four banks, according to Citigroup. Retail investors would be hurt the most, collectively losing $17 billion, solely from their bank shareholdings.
The current US equity bull market is the longest ever, global share price volatility is increasing, and the Australian stock market has lost more than $39 billion in value over the last month. The timing of this policy beggars belief. Increasing the tax bias of debt relative to equity would also increase corporate leverage and reduce company tax payments as we approach a bear market.
Doomed to fail
Like the Rudd government’s mining tax, this policy is doomed to fail. The initial forecast was for the mining tax to raise $22.5 billion over four years or over $5 billion a year – sound familiar?
After costing taxpayers $90 million to establish and advertise, the mining tax raised $126 million in the first six months before it was scrapped. A poll of 30,000 signatories of our petition to maintain the current dividend imputation system found that 70 per cent earn $90,000 or less per annum and almost 85 per cent would lose up to $30,000 year.
One-third of the 3,027 respondents plan to spend their financial assets to receive the Age Pension. This sentiment has been confirmed as we have met with more than 2,000 retail investors this month.
People impacted by this stealth tax will change their behaviour in the attempt to offset their income loss. Their choices are to spend assets to receive the Age Pension, invest offshore and take currency risk, roll into industry superannuation funds and invest in unproductive and higher risk assets. Their options would leave the nation worse off and offer no guarantee of replacing their lost income at a late stage in their lives.
When low-income earners and retirees sell their Australian shares, they will be bought by those on high taxable incomes who can claim the full benefit of the franking credits. So where are the savings coming from? More importantly, how is this equitably redistributing wealth among Australians?
Geoff Wilson is the chairman of Wilson Asset Management.