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Money Comments: How some of the wealthiest Australians pay 'negative' tax

05:48  14 march  2018
05:48  14 march  2018 Source:   brisbanetimes.com.au

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The complexity of the Australian tax system hides many sins, one of the most inequitable of which is the fact that some of Australia ’s wealthiest citizens pay negative tax . The ATO actually hands other people’s money to some of the wealthiest people in the country.

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Paul Keating thought that companies and shareholders paying tax was © Wayne Ludbey Paul Keating thought that companies and shareholders paying tax was "double taxation".

The tax treatment of earnings generated from owning shares is complicated. Because it is complicated most people think it is boring. Because it’s boring we don’t discuss it much. However Australia’s dividend imputation system is important, unique to the world and comes with approximately a $30 billion dollar a year price tag. So whatever you think about Bill Shorten and Chris Bowen’s announcement it is a good thing they have got us talking about one of the least understood aspects of tax policy in Australia.

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The complexity of the Australian tax system hides many sins, one of the most inequitable of which is the fact that some of Australia’s wealthiest citizens pay negative tax. The ATO actually hands other people’s money to some of the wealthiest people in the country. Indeed, while Centrelink chases some of our poorest citizens for seven-year-old debt, one lucky non-taxpayer actually received $2.5 million in "tax credits" in a single year.

So what on earth is going on? The answer revolves around what had, until yesterday, been a little-known feature of the Australian tax system called "dividend imputation".

When a company makes a profit it pays the 30 per cent company tax rate on that profit. In most countries, after the company pays tax it distributes dividends to its shareholders who, in turn, pay at least some personal income tax on those dividends. But Paul Keating thought that companies and shareholders paying tax was "double taxation", so in 1987 he introduced "dividend imputation credits", which simply meant that any tax paid by the company could be "credited" against any personal income tax payable.

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One lucky non-taxpayer actually received .5 million in " tax credits" in a single year. I broke my brain yesterday trying to grasp how dividend imputation works. If you're having similar trouble, this column by @BenOquist is super helpful.

A really useful explanation of ‘imputation’ #taxreform #auspol How to be wealthy and pay ' negative ' taxhttp://www.theage.com.au/national/ how - some - of - the - wealthiest - australians - pay - negative - tax -20180313-p4z45l.html?btis …

The franking credit is essentially a note that comes with the dividends that says company tax has already been paid on the dividend, giving you a discount on that income at tax time.

Whether Paul Keating’s system of dividend imputation is "fair" or not has never been widely debated in Australia for the simple reason that so few people understand how it works. But what really does not pass the fairness pub test was Peter Costello’s subsequent decision to allow people with "spare" tax credits to swap them for cash.

Before you can understand the full horror of Costello’s changes it is important to remember that he also made income from superannuation funds entirely tax free once you turn 60. That is, if you are over 60 with $10 or $20 million in superannuation, you could literally withdraw millions of dollars per year and pay not a single cent in tax on it. Paying no tax would mean tax deduction credits would be of no use. For example, a very wealthy individual drawing $1 million per year from their superannuation and paying no tax – not even the Medicare surcharge – who received say a $10,000 dividend cheque that comes with $3000 worth of "tax credits". Now imagine the frustration of our retired millionaire who, because they pay no tax, has nothing to offset their credits against.

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How does someone pay negative taxes ? The CBO's formula offsets whatever taxes are paid with "refundable tax credits." Some of these are due to According to the CBO, the wealthiest 1 percent of Americans saw before- tax income grow more than 16 percent from 2009 to 2010, which isn't such

Opinion. Australian economy. The great tax swindle: how concessions and exemptions benefit the wealthiest . The report looked at superannuation tax concessions, negative gearing, capital gains tax concessions, the use of discretionary trusts, the exemption from the GST View more comments .

Luckily for them, Peter Costello changed the law in 2000 to allow any surplus credits to be swapped for cash meaning that rather than paying no tax, they get paid $3000 by the taxpayer.

Only four other OECD countries have a full dividend imputation scheme like Australia’s: Canada, Chile, Mexico and New Zealand. Finland, France, Germany, Italy, Norway used to have such a system but dropped or reduced it to a partial system. Spain, Turkey and UK had partial imputation and dropped that, too.

It is, of course, true that some Australians will be adversely affected by changes to the dividend imputation scheme, but they are by definition those who are paying little or no tax at present. Regardless, the benefits flow overwhelmingly to the wealthiest Australians. Australia Institute commissioned modelling showed that 75 per cent of benefits of dividend imputation flowed to households with incomes in the top 10 per cent. Almost half the benefits go to individuals earning over $180,000, who make up only 2.2 per cent of the population.

Australia is one of the lowest-taxing countries in the OECD. If we are to have to fund the services, schools, hospitals and infrastructure expected by the community we need a sustainable revenue base. Indeed many in the corporate sector know that ultimately businesses can only really flourish if there is a decent society in place. To pay for that decent society and its infrastructure we can either raise tax rates or close concessions, deductions and loopholes. Our dividend imputation system – that is unlike anywhere else in the world – would be a good place to start.

Ben Oquist is the executive director of The Australia Institute.

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