More than one million shareholders, including self-funded retirees, who pay little or no tax would lose cash refunds for excess dividend imputation credits, under a proposed crackdown by Labor that would reap an estimated $59 billion in revenue over the next decade.
Following a warning last week by shadow treasurer Chris Bowen that Labor again had its sights set on loopholes enjoyed by the so-called wealthy, he and Opposition leader Bill Shorten will announce today that the cash refunds will be abolished from July 1, 2019, if Labor wins the next federal election.
Mr Shorten will stress that those affected – about 200,000 of the 600,000 who use self-managed superannuation funds along with another 1.2 million taxpayers – will not pay any more tax. But they will not be entitled to a cash refund if their imputation credit on their dividend is more than their total tax bill.
Wiping out the benefit, which was introduced by the Howard/Costello government, would save the budget $5.6 billion in the first full year, rising to $8 billion a year over the medium term. It builds on a Labor policy agenda which already includes curbing negative gearing and capital gains tax deductions for investors, clamping down on the tax treatment of trusts, boosting the top marginal tax rate and limiting the tax deduction which can be claimed for preparing a tax return.
In a speech to KPMG in Sydney today, Mr Shorten will announce Labor will restore the dividend imputation system to Paul Keating’s original design in 1987.
‘Distorts original design’
Dividend imputation, introduced by the then Labor treasurer to eradicate double taxation, entitles a shareholder to a tax credit, or imputation credit, on a dividend which is equivalent to the company tax already paid on that dividend.
Under the changes introduced by the Howard government in 2000, if a shareholder, be it an individual or a superannuation fund, had an imputation credit higher than the tax they paid, then they would receive the excess as a cash refund from the Australian Tax Office. At the time of the change, it cost the budget $550 million a year but that cost has increased tenfold since and Labor says it is a structural impost the budget can no longer afford.
“The Howard-Costello subsidy entirely distorts the original design of the dividend imputation system. It makes Australia the only OECD country with a fully refundable dividend imputation credit system,” Mr Shorten will say today.
He said the estimated $8 billion annual cost the cash refund will hit next decade is more than is spent on schools or childcare. The cash refund was eroding the superannuation tax base.
“Let me be very clear about this, Labor created dividend imputation, we understand its value and we will maintain it,” he will say.
“Everyone will still be able to use imputation credits to reduce their tax, but not to claim cash refunds.
“A small number of people will no longer receive a cash refund but they will not be paying any additional tax.”
The changes, if Labor is elected, will apply from July next year and affect future earnings and franked dividends that flow in the following financial year, 2020-21. Charities and other not-for-profit organisations will be exempt.
Work on the policy undertaken by the Parliamentary Budget Office finds 92 per cent of taxpayers do not receive these cash refunds. That means about 1.2 million taxpayers will be affected along with 200,000 SMSF users who pay little or no tax.
Of those who do receive the refund, 90 per cent of the money accrues to Self-Managed Superannuation Funds which represent less than 10 per cent of all superannuants.
Furthermore, Labor will argue 50 per cent of the cash refunds go to the wealthiest 10 per cent of SMSFs and that the top 1 per cent of SMSFs receive an annual average cash refund of $83,000.
“Shareholders who may be affected will have the ability to adjust their investment decisions to limit any impact from this policy,” the Labor policy document says.
The policy is understood to have the imprimatur of Mr Keating, who Mr Bowen consults from time to time.
The revenue will give Labor more room to dedicate more to budget repair and fund some spending promises. It will also enable it to sharpen the contrast with the government which wants to increase the Medicare levy across the board to help fund the National Disability Insurance Scheme. Labor wants to exempt low and middle-income earners from the levy hike.
“They would rather make a police officer on $70,000 pay an additional $350 in tax every year than close a loophole only used by people who already have millions of dollars to their name,” Mr Shorten will say today.
It is likely to lead to increased attacks from the Turnbull government which has already estimated that the Labor tax policies announced so far will add $164 billion to the tax burden over the next decade.
Labor, if elected, will confine all future negative gearing to new homes only and halve the CGT exemption for investors who have held an asset for at least a year from 50 per cent to 25 per cent. It will increase the top marginal tax rate to 49.5 per cent, clamp down on income splitting by imposing a 30 per cent tax on distributions from family trusts, and it will limit to $3000 the tax deduction for the preparation of a tax return.
“On average, Labor’s $164 billion in higher taxes over the medium term means that every Australian man, woman and child will pay the equivalent of more than $6000 in higher taxes,” the government’s modelling said.
“Even without taking into account Bill Shorten’s plan to increase taxes on companies, Labor’s direct tax hit on ordinary Australians would be felt across the country.”
The latest announcement will increase that $164 billion to $223 billion.
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