Inquiry submission: Abolish the cashing out of franking credits

by David Richardson

Dividend imputation was introduced by the then Treasurer Paul Keating in 1987 with the aim of eliminating the so-called double taxation of company income.

Under dividend imputation the individual who receives dividend income is taxed but receives credit for company tax paid by the company. Company tax paid by the company is imputed to the shareholder and the shareholder is taxed at the appropriate tax rate. Credit is given to the taxpayer for company tax deemed to have been paid on behalf of the taxpayer. This is said to eliminate the double taxation of investment income. It is based on the view that the company is just a community of shareholders and that investing as a shareholder should be treated equivalently to running a business as an individual.

The view that the company is an extension of the individual shareholder is somewhat quaint in a world in which even very rich individuals rarely have a significant share of the larger companies in which they invest. By the same token the modern corporation has outgrown its ultimate owners. Natural persons own less than 10 per cent of Australia’s listed shares for example.

In 2014 the Senate Community Affairs References Committee inquiry into the extent of income inequality asked the Australia Institute for supplementary information on dividend imputation. Much of the background detailed in the present submission is based on that publication. Some of the data in this submission may be dated but the orders of magnitude should be similar.

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