Let’s be honest: who actually knew about dividend imputation before the Labor leader, Bill Shorten, announced the policy to scrap cash refunds that exist under the current system?
It’s a policy reform that is well overdue, an option considered by the Liberal Party for inclusion into the 2017 Budget and, my insider sources claim, the Treasurer, Scott Morrison, was planning to include exactly the same policy change in the 2018 Budget.
And why not? It’s currently costing the budget over $6 billion per year and most of the benefits accrue to the highest 10 per cent of income earners in the country. The Labor plan to remove this grand impost on the community makes fiscal sense, and removes an inequitable component of the tax system.
What is dividend imputation?
At the heart of dividend imputation is the notion that profits shouldn’t be taxed twice. Public companies that are taxed on their profits, distribute those profits to their shareholders through franked shares, and shareholders receiving these franked shares are able to credit the tax already paid by the public company. When lodging their tax returns, shareholders claim the dividend as well as the tax already paid by the company as income, and the proportion of tax already paid becomes a tax credit.
If the shareholder has an income under the tax-free threshold under $18,200, they will receive this tax credit as a cash refund. This is the situation that Shorten wants to end, and if Labor is to win the next federal election, the reform will be in place by 2019, saving an estimated $59 billion over the next decade.
Along with New Zealand and Malta, Australia is one of three countries in the world that allows this type of dividend imputation scheme. Dividend imputation was introduced by the Hawke government in Australia in 1987 with exemptions for small shareholders introduced by the Howard government, with full deductions and tax credits available from 2000 onwards.
But whether profits are being taxed twice is a moot point, and it comes down to a philosophical debate about the difference between company profits on one hand, and shareholder income streams on the other.
Interest earned on cash holdings is not treated in this way, and losses accrued for negatively geared assets don’t result in a tax credit if the owner of those assets hasn’t paid any tax in the first place.
Superannuation is taxed twice – 15 per cent when it’s paid by a business into an employee’s superannuation account, and another 15 per cent when the superannuation is withdrawn after retirement – so this notion of avoiding ‘double-taxation’ isn’t so sacrosanct, and seems to be acceptable to the government when it’s applied to workers, rather than companies.
A swift mainstream media response
We can never underestimate the ferocity of the mainstream media when it comes to supporting conservative politics and attacking the Labor Party on sensible policy reform.
Of course, every mainstream media outlet has a team of researchers and fieldworkers to find the talent for the evening news but even I was surprised at their ability to find the most seemingly hard-luck story in the most obscure location to generate a negative news story to hold up against Bill Shorten.
Shorten announced the proposed Labor policy with the Shadow Treasurer, Chris Bowen, on Tuesday morning to the Chifley Institute in the KPMG offices in Sydney.
Now, there are two ways this policy announcement could have been reported: that it improves the underlying position of the federal Budget, improves the equity of the tax system and saves the budget $59 billion over a decade, and removes an entirely unwarranted and unrewarded cash back for a part of the community that doesn’t need it; or they could have reported the policy announcement, as a “brutual and cruel” tax grab affecting the “lowest incomes’.
No prizes for guessing which angle the media went for.
The same journalists that bemoan the lack of courage shown by our current crop of politicians, were the same ones taking pot shots against Shorten and Bowen, and broadcast the maniacal and over-the-top ramblings of the Prime Minister, Malcolm Turnbull, Morrison, and the Finance Minister, Matthias Cormann with alacrity.
First off the rank on Tuesday evening was the ABC’s 7.30. Fresh from their self-censorship debacle with their key economics journalist, Emma Alberici, the presenter, Leigh Sales, introduced the story with a backdrop of dark graphics and the words ‘Cash Withdrawal’ in a massive typeface, before she commented there was ‘outrage’ from those potentially affected.
Cue reporter Tom Iggledun, who introduced our loungerooms to Lyle Essery, a 56-year-old former graphic designer on the outskirts of Brisbane, already one year into his retirement. “He’s living the dream,” announces Iggledon, of course, implying it’s just about to be ruined by Shorten and his team.
We are told Essery accesses $56,000 per year through share dividends, and about $17,000 of this is through tax credits through dividend imputation, the tax credit refund system the ALP wants to end.
“We won’t be able to keep the loans up on the caravan,” says Essery, before adding, “we’ll have to sell stuff… we’ll have to really reduce our lifestyle. Without those dividends, we have no income.” Well, cry me a river, but that’s not true – he’d still have a reasonable income, albeit lower. And perhaps he might need to assess what many in retirement will have to do – sell the caravan, sell some shares, downsize, live within your means and stop complaining.
Iggledun helpfully adds in his voiceover: “His careful strategy of investing in high-dividend Australian companies would unravel under Labor.”
Nowhere in this story do we find out that because of his $56,000 income stream through shareholdings, Essery would own around $1.3 million in share assets. We don’t receive any of the background – why did Essery retire at the age of 54? Should he be supported by the Australian tax system for what is, essentially, a personal lifestyle choice?
A classic Fairfax beatup
Although it took another day to develop its story, the Sydney Morning Herald, supposedly ‘Independent. Always’, also decided to lay the boots into Labor’s policy, introducing us to Margaret Osbourne, a 64-year-old fully-self-funded retiree living in the inner west Sydney suburb of Rozelle, who is announced as “a rusted-on Labor voter”. So rusted on that she’s decided to abandon the party when the going got tough.
We are told that her income will drop by 30 per cent under Labor’s policy but, again, we don’t receive the full picture – we are not told how much she is currently earning through dividends, or what her share ownership is, but it’s clear from the published photographs that she is well off and not exactly living in struggle street. Incidentally, the photograph looks like the more affluent Birchgrove, than the less affluent Rozelle – but let’s not ruin a good news story, especially when the target is Bill Shorten.
In his address to the Chifley Institute, Shorten announced his main priority was “to stand up for middle class and working people to make sure they get a proper go in Australia and offer tax relief to lower income people.”
Turnbull, responded by saying that Labor’s policy would be a disaster, and suggested people should “have a word to your parents and they’ll tell you how the feel about it and their friends. I can tell you. And you know I’m right. I’m Bill Shorten is going after the savings of your parents and their friends and their contemporaries. He’s going after them.”
I’d suggest Turnbull should have a word with his advisors and political minders and come up with some better ripostes and arguments, instead of coming across as an economic dilettante.
Grant Wardell-Johnson, a partner at KPMG’s Australian Tax Centre, and Paul Docherty, Senior Lecturer as the Newcastle Business School, have gone one step further than Labor, recently arguing the entire dividend imputation system needs to be scrapped to enhance local investment by Australian companies, move towards better research and development, and longer-term and innovative businesses. Germany, in 2000, and France, in 2004, removed dividend imputation entirely and, although there’s no direct causal information available to prove a link, their economies improved.
Labor’s policy, according to economist Saul Eslake, is good economics, essential for working towards budget repair and restore equity within the Australian taxation system.
It’s a pity the Liberal Party prepared an inept political response to what is a critical issue for equity and the future of the nation’s finances, and a massive brickbat to the mainstream media for attacking was is essentially good policy, and predictably continuing to support what is, and has been for the past five years, a circus act of a government.