Reforming Dividend Imputation

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A Shorten Labor Government will reform dividend imputation so wealthy people who pay no income tax no longer get a cash refund simply for owning shares, in order to fund better schools and hospitals.

Pensioners will be protected from these changes.

Dividend imputation exists to ensure that dividends to shareholders are not subject to double taxation.

Hawke and Keating introduced imputation credits in 1987 to avoid tax being paid twice on company profits and dividends. These credits allowed shareholders to reduce their income tax when companies paid them dividends on their shares.

But the original system was changed by the Liberals to give cash refunds to people who don’t pay income tax.  Howard and Costello changed the rules to allow individuals and superannuation funds to claim cash refunds for any excess imputation credits.

Australia is the only country with a fully refundable dividend imputation system. Refundable tax credits are an anomaly in the Australian tax system, as most tax concessions in Australia are non-refundable tax offsets.

Working Australians typically go to work and pay their PAYG taxes and if they own shares, they use imputation credits to offset their personal income tax liabilities.  That is, they use imputation credits to pay less tax, but don’t receive a cash refund.  Just four per cent of Australians benefit from this concession.

Recipients of cash refunds are typically wealthier retirees who aren’t paying income tax.  These are people who typically own their own home and have other tax-free superannuation assets.  For people of retirement age more than 80 per cent of the benefit is going to the wealthiest 20 per cent of retirees.

When cash refunds were first introduced, it cost just $550 million a year. Now it’s $6 billion a year and growing.

This will soon cost the budget $8 billion a year – more than we currently spend on public schools.

Reforming dividend imputation will help Labor restore funding cut by the Liberals and Nationals, to ensure every community has quality public schools and hospitals.  We want better schools and hospitals not better tax loopholes for those people who are already well-off.

LABOR’S PLAN

Labor will reform dividend imputation to end tax loopholes that benefit wealthy Australians, freeing up taxpayer funds to invest in our schools and hospitals.  Labor will maintain dividend imputation, but not allow cash refunds for people who have managed to reduce their tax rate to zero and pay no income tax.

Under Labor’s policy, no one will lose a cent of their share dividends, and they will not pay any more income tax.  And pensioners will be protected.

Our changes include a Pensioner Guarantee which exempts all pensioners and allowance recipients from changes to dividend imputation. Under the Pensioner Guarantee:

  • Every recipient of an Australian Government pension or allowance with individual shareholdings will still be able to benefit from cash refunds. This includes individuals receiving the Age Pension, Disability Support Pension, Carer Payment, Carer Allowance, Parenting Payment, DVA pensions, Newstart and Sickness Allowance.
  • Self-managed Superannuation Funds with at least one recipient of an Australian Government pension or allowance as at 28 March 2018 will be exempt from the changes.

Labor’s policy will also exempt:

  • ATO endorsed income tax-exempt charities.
  • Not-for-profit institutions (e.g. universities) with deductible gift recipient (DGR) status.

The policy will commence on 1 July 2019.

Labor will consult with the Australian Taxation Office, Treasury and tax experts on the implementation of this policy.  Labor has already announced it would provide substantial new resources to the ATO to ensure its policies are implemented effectively.

Labor’s policy will save around $14.3 billion over the forward estimates.