Viewpoints: could Labor's tax changes make the system fairer or hurt investors?

  • Written by Danielle Wood, Program Director, Budget Policy and Institutions, Grattan Institute

The Australian Labor party will scrap a system that refunds more than A$5 billion a year to low or zero tax paying investors, should they win government.

Franking credits” are designed to stop tax being paid twice on Australian corporate profits, allowing shareholders a credit for the tax paid by the company. But when shareholders don’t pay taxes at all they can claim a cash refund for unused credits from the tax office.

Scrapping cash refunds on unused franking credits could make the tax system fairer according to Danielle Wood, Brendan Coates and John Daley from the Grattan Institute.

But according to Gordon Mackenzie from UNSW, these cash refunds incentivise people to invest in Australian companies, and ending them could see super and self-managed super funds, in particular, pulling their investment from local companies.

Labor proposes to abolish cash refunds of unused franking credits for individuals and superannuation funds. Not for profits and universities, which do not pay income tax, will continue to receive cash refunds for franking credits.

A piecemeal move towards a fairer tax system

Danielle Wood, Brendan Coates and John Daley, Grattan Institute

Labor’s proposal is not comprehensive tax reform. But in the absence of that holy grail, it is a piecemeal move towards a more equitable tax system. The change will primarily affect wealthy retirees.

The wealthiest 20% of retirees own 86% of shares held by older Australians outside of super. And among self-managed superannuation funds (primarily held by wealthier retirees), half of the refunds are currently going to people with balances over A$2.4 million.

Abolishing cash refunds for individuals and superannuation funds will raise about A$5 billion a year in extra revenue. About 33% will be paid by individuals (mostly in high wealth households), 60% will be paid by self-managed superannuation funds (typically held by wealthier retirees), and the remaining 7% will be paid by Australian Prudential Regulation Authority regulated superannuation funds.

Viewpoints: could Labor's tax changes make the system fairer or hurt investors? Author provided Cash refunds on franking credits were introduced in 2001 for shareholders who had more franking credits than the tax they owed. The theory was that people with no or low income should have the same incentives to invest in Australian companies as other investors. At the time, the decision cost the budget little – around A$550 million a year – because very few people with low income also owned shares. But new superannuation rules in 2006 relieved retirees from paying any tax on their superannuation withdrawals. Retirees also pay no tax on their super fund earnings. As more people with significant super balances retire, an increasing number qualify for cash refunds on unused franking credits. And a series of changes to the Seniors and Pensioners Tax Offset increased the proportion of over-65s paying no tax on earnings outside of super. The cash refund system now costs the federal budget more than A$5 billion a year. But abolishing cash refunds on dividends won’t be costless. The franking credit regime was set up for a variety of good reasons. It aimed to bias Australians towards investing in Australia. In practice this appears to have led to Australian companies being funded more through equity and less through debt, improving financial stability. In theory it would also lead to more physical investment in Australia, although there is less evidence that this has happened. In practice, franking credits also encourage Australian companies to pay dividends rather than inefficiently hoard cash or invest in low-return projects. Read more: How the government can pay for its proposed company tax cuts So abolishing cash refunds, but keeping franking credits for those who do pay income tax, is probably not the ideal policy. It abandons the principle that all company profits should be taxed at an investor’s marginal rate of income tax. And it reduces the incentive for retirees to invest in companies from Australia rather than overseas. On the other hand, the decisions not to tax superannuation withdrawals and to increase the effective tax-free threshold for older Australians have led to wealthy retirees contributing very little to government revenues relative to younger households. Even though the wealth of older generations has jumped in line with asset prices, the share of senior Australians who pay income tax has nearly halved – from 27% to 16% – in the past two decades. In an ideal world the federal government would reintroduce a number of higher income and wealthy older Australians to the tax system by taxing superannuation earnings and abolishing age-based tax rates. But in the absence of the political will to make these changes, abolishing cash refunds provides a big boost to the budget bottom line from more or less the same group. The changes could bring distortions to investors Gordon Mackenzie, Senior Lecturer, University of New South Wales Chasing franking credits is one of the few tax issues that super fund investment managers take into account when investing, and is a significant consideration for self-managed super funds, according to my research with Professor Margaret McKerchar. As the previous authors mention, franking credits are intended as an incentive for certain investors to invest in Australian companies. Under the rules, super funds and self-managed super funds don’t pay tax when they are paying a retirement pension, if the account balance is below a certain level. Since they pay no tax, it is worthwhile for these funds to invest in Australian companies that will pay franking credits. Doing so allows them to claim credits from the tax office. But this also means that if cash refunds on franking credits are done away with, it is an implicit 30% tax increase on super and self-managed funds that invest in Australian companies. This creates an incentive for them to put their money elsewhere. If these funds invest in something like a government bond then they will pay no tax on the profits. If they invest in an Australian company, the company will pay the corporate tax and there will be no way for super funds to claim the tax back. Read more: Tax reform aside, there's no real case to kill off dividend imputation Many self-managed super funds have accounts for paying a pension to the member and another account for accumulating funds, but not paying out anything. Self-managed super funds will likely replace Australian shares in their pension accounts with assets such as bonds or managed funds. This is important, as data shows that Australian shares are one of the largest asset classes held by self-managed super funds, ranging between 21% and 30.8% of the entire portfolio, depending on the size of the fund. The response of other types of superannuation funds will probably be more muted. While they do value imputation credits, they also care about diversifying their portfolios - there will still be benefits to holding some Australian shares. Overall, then, imputation credits are important to superannuation funds, both big and small. The refund not only makes certain types of investment attractive, but also drives how much is invested in that type of investment.

Authors: Danielle Wood, Program Director, Budget Policy and Institutions, Grattan Institute

Read more http://theconversation.com/viewpoints-could-labors-tax-changes-make-the-system-fairer-or-hurt-investors-93280

Australia Today

Dry Carpet Cleaning Vs Steam Carpet Cleaning: Which one to Choose?

News Company

A clean carpet not only improve your interiors, increases your comfort around the office and home but also beneficial for your health. This is why it is necessary to choose the right way to do it. Either you can take the high road and do it yourself, or you can hire the professional to do the clea...

Read more

Creating research value needs more than just science – arts, humanities, social sciences can help

Rachel A. Ankeny, Professor of History and Associate Dean Research (Faculty of Arts), University of Adelaide

Actually yes, science and the arts do work together. from www.shutterstock.com This week we’re launching Making science for people, a series of articles that explores how humanities, arts and social sciences expertise is applied to problems typically corralled into the science and technology s...

Read more

Patriarchs on pedestals? How doctors are taught to improve their bedside manner

Mark Wilson, Associate professor, University of Wollongong

Student doctors need good role models to learn good patient communication. from www.shutterstock.comUp until around 30 years ago, in the days of paper patient files, doctors were on pedestals and patients generally did as they were told, in a more patriarchal model of patient care. Over 2,400 years ...

Read more

How the Anglican Church has hardened its stance against same-sex marriage

Muriel Porter, Honorary Research Fellow, Trinity College Theological School, University of Divinity

In the aftermath of the legalising of same-sex marriage in Australia, the Anglican Church has ramped up its discrimination against gay people to new heights.Not content simply with the discrimination built into the legislation – per ministers of religion to refuse to marry same-sex couples &nd...

Read more

rejecting neoliberalism shouldn't mean giving up on social liberalism

Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

shutterstockRichard Denniss’s Quarterly Essay, “Dead Right: How Neoliberalism Ate Itself and What Comes Next”, is a thought-provoking call to arms against an array of perceived ills – economic rationalism, market forces, small government, tax cuts, incentives, even corporate ...

Read more

Holidays & Travel

Dredging works underway Plantation Island

Tourists and workers travelling to popular tourist destination Plantation Island, Fiji, are set to benefit from safer access when marine channel dredging is completed at the end of June 2018...

Top 5 Tips for Traveling With Dogs

Travelling with your dog can be thrilling, but sometimes it can turn into a real nuisance. Unless you know how to properly restrain the pooch, whether it’ll be able to...

Top Island Destinations for 2018

When we picture island destinations in our minds, we often imagine a tropical beach of white sand, a sun lounger laid out in the shade of a line of palm...

Why Car Rental Excess Insurance is a Smart Choice

Some car rental agencies include basic damage cover in the standard rental fee, with the option to add on liability reduction, or excess insurance. The addition of excess insurance normally...

More Than a Third of Australians Feel 'Too Busy' With Work to Take a Holiday

New research from InterContinental Hotel & Resorts has unveiled a large number of Australians (32 percent) are simply too busy with work to take some much-needed rest and relaxation. Almost...

Matakauri Lodge and Mahu Whenua Lodge

TRIED, TRUE AND SOMETHING NEW  A luxurious accommodation package at Matakauri Lodge + Mahu Whenua Lodge South Island, New Zealand  Available 1 May, 2018 - 30 September, 2018   Central Otago, NEW ZEALAND –...

Heaven is the Adelaide Hills

Looking for a quick getaway? Enjoy food and wine? How about stunning countryside? Look no further! The Adelaide Hills has something for everyone. We flew to Adelaide for a weekend-getaway...

5 Amazing Australian Holiday Ideas

Australia is one of the most fantastic places in the world to travel, explore, and witness all of the beauty that Mother Nature has to offer. With so much rich...

Top Amenities You Enjoy by Renting Luxury Caravans for Road Trips

Do you love to undertake road trips? What the luxury cruises on the ocean are for ocean travelers, luxury caravanning is the same for land-lubbers. Traveling in a luxury caravan...

Fashion & Beauty

Simple Secrets To A More Confident Smile

We all know just how important first impressions are. After a handshake, what’s one of the first things people will notice about you? It’s your smile. A friendly smile is...

Improve Your Body Confidence and Feel Great

No matter how good you feel about yourself, sometimes you just can’t help but see a few little flaws that seem gigantic to you and make you feel self-conscious. Whether...

First-Timer Tips For Your First Lip Filler Appointment

Getting injectable lip fillers can be a quick and effective way to plump up your smile with minimal drama. They’re a cost-effective and safe way to boost the natural shape...

The Most Common Skin Conditions and How to Deal with Them

We often underestimate the importance of our skin, but as the largest organ in our body, and our primary layer of defense, it is constantly affected by many environmental factors...

Beach Babe Basics: Everything You Need to Look Stylish at the Beach

Summer is right around the corner, and this year, we all should make the best of it. Right now, it is not just about looking stylish on the streets, it...

Easy Dress-Up Tips for Lazy Girls

Look, getting all dolled up is fun, but you may not always be in the mood for it. Unfortunately, though, this is exactly when you are asked to go to...

HEALTH

My Health Yoga

Carrie-Anne Fields of My Health Yoga has taken her Gold Coast yoga teacher training worldwide. She started her health business 20 years ago aged 22 and has grown into a...

Fit Body 101 - Increase Your Fitness Effectiveness

You have to find some space for physical exercise in your weekly schedule in order to live a good life. Embracing this way of life is very beneficial because it...

The World of Dentistry: 5 Most Common Dental Procedures in Australia

Are you dissatisfied with the state of your pearly whites? Do you often experience discomfort and pain while eating and drinking? Well, be sure that you’re not the only one...

How You Can Conquer Your Dental Anxiety

Does the thought of going to the dentist fill you with dread? Well, you will be pleased to know that you are not the only one. A large number of...

Up and away: the impact of flying on your health

These school holidays, many people will take to the skies, unaware of the risks flying can pose to their health. Brisbane based house call doctor Ryan Harvey said it was important...

How to Lose Weight After 40

As you age, your metabolism slows down, which makes losing weight much harder. Additionally, your hormones start to fluctuate significantly, causing easier weight gain. Sticking to the same tricks you...

LIFE STYLE

Dry Carpet Cleaning Vs Steam Carpet Cleaning: Which one to Choose?

A clean carpet not only improve your interiors, increases your comfort around the office and home but also beneficial for your health. This is why it is necessary to choose...

Carpet cleaning: Things you need to know

Carpets are one of the most essential room interiors, and the kind of maintenance it requires is nothing worth comparison. We understand the importance of good health and hygiene at...

Get The Look: How to build a beautiful weatherboard home

Coastal, Queenslander and Contemporary Australia’s love affair with the weatherboard look can be seen in many of our historic and most popular styles – from the Queenslander to coastal and new...

The Fabrics That Make the Simple Indian Saree Sizzle

6 Yards of Sophistication and Sensuality Saree – an attire that can take you from boardroom to cruises; from kitchen to red-carpet; from lounging to marathon; from weddings to vacation –...

6 Tips for Mixing Design Styles Like a Pro

Each interior style is unique in its own way, creating a specific ambiance in our homes. While some accentuate simplicity and formality, others embrace playfulness and authenticity. Thus, you’re left...

Deborah Hutton: Designing My Dream Hamptons Inspired Home

Television presenter, magazine editor and media personality, Deborah Hutton is renovating her charming three bedroom house in Bronte, into her own Hamptons inspired forever home, with work due to be...

FOOD & DINING

Morning greens: the breakfast skincare regime

It’s safe to assume that most Aussies fail to eat enough greens. Although this was momentarily resolved with the rise and popularity of the green juice movement, the lack of...

Best Hidden Gem Hong Kong Restaurants

You finally find yourself enjoying the endless beauties of China and this fascinating city. In a place with so much variety, all your senses will be wide awake, and your...

JOHNNY DI FRANCESCO NAMED OFFICIAL AMBASSADOR OF EAT STREET MELBOURNE

Johnny Di Francesco, world champion pizzaiolo and owner of Melbourne’s Gradi Group of restaurants, is excited to announce he has been named official ambassador for Eat Street Melbourne 2018. As Ambassador...

The best Mother's Day gift EVER!

Whether it’s to celebrate a special occasion, or just wind down at the end of a long day, there’s nothing much better than pouring yourself a glass (or two…) of...

Sing for Your Supper at Chargrill Charlie’s

To celebrate the final curtain call of the Barden Bellas, Chargrill Charlie’s is giving you the chance to Sing for your Supper! Show off your best acapella vocals to win...

MAKE IT WINE TIME, ANY TIME

Whether it’s to celebrate a special occasion, or just wind down at the end of a long day, there’s nothing much better than pouring yourself a glass (or two…) of...