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Boost budget by chopping charities' tax take

  • 27 August 2013

The prospect of a small drop in dividend imputation credits in the Coalition’s paid parental leave proposal has caused great consternation.

Retirees, charities and other innocents were all going to suffer unnecessarily, it was claimed. The Coalition’s 1.5 per cent levy on 3200 companies will not qualify for franking credits, meaning that shareholders would lose a portion of the tax breaks on their dividends.

This suggests two things. One is that, no matter how small or logical the change to the tax system, the objections will be loud and long.

This was evident when the Rudd government proposed to crack down on fringe benefits tax for cars, which was little more than saying: ‘We will administer our own rules properly’. It set off a furore, which was as close as it is possible to get to a collective admission of guilt. The more people complained, the more obvious it was that the whole thing has become a rort. Imagine people having to prove that they use the cars for the purpose for which they claim to use them.

Secondly, it reveals by implication that Australia’s company tax treatment should not just include the headline number. Business leaders are fond of claiming that company tax is ‘unsustainable’ at 30 per cent. Is that correct? ‘Up to a point, Lord Copper’ might be the reply, at least when it comes to Australia’s big public corporations. The gross statistic does not include the effect of dividend imputation (franking), which is designed to stop ‘double taxation’. Once company tax has been paid, it is not paid again by the investor on the dividends.

Australia is one of only a few countries in the world that has a franking credit system. If company tax has been paid on dividends, then those dividends are tax free in the hands of shareholders. It makes the profits paid out as dividends more valuable, after the effect of tax is taken into account.

According to economist Nicholas Gruen, the cost of imputation (franking) is about $20 billion a year. That suggests, at least prima facie, that if dividend imputation was eliminated it would remove about two thirds of the current budget deficit. Or the savings could be used to reduce the company tax rate. Gruen argues it could be lowered to 19 per cent.

To show how imputation works, consider an example. If Telstra makes $1 billion pre tax it is liable for tax of $300