Taxpayers fork out $4.6b to pay for ‘dividend imputation’ credits

New modelling by NATSEM, commissioned by The Australia Institute, shows many of Australia’s wealthiest people pay negative tax, and it’s costing the budget bottom line $4.6 billion. Report available here.

Like most tax loopholes, the ability to convert ‘surplus’ dividend imputation credits to cash delivers most of its benefits to the wealthiest, with almost half of all franking credits going to the top 2.2% of income earners, and virtually nothing to low income earners (see tables below).

“Refunding so called ‘surplus’ imputation credits goes virtually unnoticed, but it’s costing the budget $4.6 billion per year. Australia is the only country in the world to refund unused franking credits,” Executive Director of The Australia Institute, Richard Denniss said.

“It’s hard to imagine a fairer and less politically painless way for the government to collect some more revenue than to end this inequitable tax break. It’s the lowest of the low hanging fruit.”

How ‘Dividend Imputation’ works:

  1. To avoid double taxation, tax paid by companies can be used as a credit against personal tax by shareholders. When shareholders receive their dividend cheques, shareholders also receive ‘imputation credits’ or ‘franking credit’.
  2. Recipients who have no income tax liability, due to either their other deduction or retirement status are given a ‘refund’ for the company’s profits tax that has already been paid on their dividends.
  3. The Government not only doesn’t tax the individual, but pays them an additional sum, equal to whatever tax the company paid on their dividends.

“Franking credits are worth about $30 billion per year in Australia. About $10 billion go to households and another $10 billion go to superannuation funds, trusts and charities. The remaining $10 billion go to other Australian companies.

“The current budget deficit was caused by the expensive and inequitable tax changes introduced at the beginning of the mining boom by peter Costello such as halving capital gains tax, next tax concessions for superannuation and allowing the refund of imputation credits.

“It’s clear from the budget papers that the government has a revenue problem not a spending problem.

“If the government is serious about reducing the deficit then scrapping the refundability of imputation credits would seem like an easy and fair budget fix,” Dr Denniss said.

Earlier this month, The Australia Institute released a policy brief outlining a ‘Buffett Rule’, which would close loopholes used by very high income earners to reduce their tax to, or beyond, zero.

Table 1 – Very high income earners proportion of franking credits

Incomes above

Proportion of taxpayers

Proportion of franking credits

$1,000,000

0.08%

17.1%

$500,000

0.3%

27.2%

$250,000

1.3%

42.2%

$180,000

2.2%

48.8%

Source: ATO tax statistics

Table 2 – Income distribution of franking credits

Decile

Franking credits received by households ($m)

Proportion of total households

1

$59

0.6%

2

$105

1.1%

3

$28

0.3%

4

$71

0.7%

5

$192

1.9%

6

$266

2.7%

7

$296

3.0%

8

$593

6.0%

9

$913

9.2%

10

$7,404

74.6%

Total

$9,926

100.0

Source: STINMOD 2014-15 Financial year estimate

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