Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 3

Dividend imputation and superannuation are worth fighting for

In this third article which draws on my November 2012 speech to the ASFA Conference, I wish to say something about one of my favourite subjects, the company tax system.

Before I became Treasurer, company income in Australia was taxed twice: once at the company rate, at the time 46%, and then the dividends were taxed at the top personal rate of 60%. On $100 of company income, this left only $21 in the hands of the taxpayer!

In 1985, I changed the system completely and removed the double taxation of company income by introducing full dividend imputation. This meant that company income would only be taxed once. And this concession was reserved for Australian taxpayers.

People should understand that for Australian taxpayers, the company tax is broadly a withholding tax. The government collects it at the 30% rate on company income – and temporarily hangs onto it – before returning it to shareholders (including local superannuation funds) in the form of imputed credits.

In other words, when a company issues its dividends on a fully franked basis, it hands back the company tax paid earlier and staples it to the dividend.

This is my point. If the company tax rate is reduced from 30%, the principal beneficiaries will be foreigners, those who do not qualify for imputation credits. A reduction in the 30% rate, to say 25%, will diminish the value of dividends paid to superannuation funds and self-funded retirees. Such a move would effectively increase the rates of tax applying to superannuation.

The question is: do you know any foreigners you want to give 5% of our national company income to? Any deserving cases out there? Or should we leave the company tax rate where it is, as a withholding tax, for the promotion of Australian investment and for the benefit of Australian taxpayers?

I believe the superannuation industry should have a jaundiced view of reductions in the existing company tax rate but, more than that, remain vigilant in protecting ‘dividend imputation’. Dividend imputation revolutionised capital formation in Australia. The Treasury was uncomfortable with it because of its cost to revenue, and about every seven years it promotes a debate to remove it.

I also wish to say something about the cost of capital.

Before mandatory superannuation, the equity risk premium in Australia was well above the OECD average. Today, it is well under it. Superannuation now massively underwrites capital formation in Australia. Indeed, one of the principal reasons the 2008 GFC was less severe for Australia was our ability, through the super pool, to rapidly and effortlessly fund $90 billion of company re-capitalisations. This would have been unthinkable in earlier financial crises.

This is another reason the Business Council of Australia and its constituency should continue to support the consolidation of mandatory superannuation to the point of maturity. This includes supporting increased levels of the super guarantee as discussed in previous articles. We need a national consensus on this. We need the Coalition to take co-ownership of the system with the Labor Party, and we need the business community’s support for them to do it.

Superannuation is about de-risking the future. In the system I set up, people were encouraged to salary sacrifice in later life, when mortgages had been paid off and they had discretionary income. Under that policy, people could salary sacrifice up to $100,000 a year when over 50 years of age. I believe the current limit of only $25,000 is too low, certainly for those over 50.

This is where long term vision is important. While the government and the Treasury would see an increase in permissible voluntary contributions as a cost to the Budget in revenue forgone due to reduced tax revenues today, such increased limits would provide the government with certainty in the later years by reducing its future funding obligations. This was one of the original intentions when the foundations for the current superannuation system were laid over 20 years ago.

Hon Paul Keating was Treasurer of Australia between 1983 and 1991 and Prime Minister between 1991 and 1996.

 

 

4 Comments
Steve
March 09, 2018

Right on the money Bill.
There is a certain hysteria associated with a possible reduction of the corporate tax rate; the hysteria centres around the loss of franking credits. But as you eloquently point out, assuming the company's dividend payout ratio is the same, the shareholder receives a higher cash dividend. That part of the equation seems to have been missed!

Bill Watson
February 15, 2018

I have trouble seeing why "A reduction in the 30% rate, to say 25%, will diminish the value of dividends paid to superannuation funds and self-funded retirees."

If a retiree's share of say, $100 company profit, then that person would receive $70 dividend and a franking credit of $30 (for a 30% company tax regime).

If the co tax rate was reduced to say 20%, then for the same $100 co profit the person would receive $80 dividend along with a $20 franking credit. Both these amounts (ie $100 would be added to the persons other taxable income (if any) and be taxed accordingly. The end result is the shareholder would be no worse off as a result of the lower co tax rate.

Am I missing something?

Angus Stephen
March 28, 2013

Great article - and simply lowering the tax rate is going to provide a disincentive to companies to improve productivity, which many agree is the main game when it comes to remaining relevant in today's competitive times. Your point regarding contributions caps again points out that the political cycle is a poor master for our life cycle. How do we get them to take a long term view?

Tim Buckley
February 22, 2013

Mr Keating,
I am still left wondering why is it that Wayne Swan continues to bang on about lowering the corporate tax rate? Who does he think this helps in Australia? Yet the SMH's Clancy Yeates on 25 October 2012 reported that "Treasurer Wayne Swan's business tax working group yesterday said a cut in the 30% company tax rate would provide significant economic benefits, and wage earners would be the ultimate winners." Significant economic benefits - how? Exactly as you say, franking makes this irresponsible. How can Swan be given such stupid advice? Lets help foreign investors and super wealthy tax avoiders pay even less tax?? Almost as stupid as not increasing the super contribution rate to 12%.

 

Leave a Comment:

     

RELATED ARTICLES

OK Boomer: fessing up that we’ve had it good

Why extra super contributions tax may catch you too

How super became a poor deal for SMSF pensioners

banner

Most viewed in recent weeks

Great new ways the Government helps retirees

Last year's retiree checklist of services available was one of our most popular articles. There are some additions for 2021, and while it can take effort to set them up, they can pay off over the long term.

Four simple strategies deliver long-term investing comfort

A long-time advocate of the merits of generating income by investing in industrial companies rather than bonds or deposits checks his 'mothership' chart for the latest results, and continues to feel vindicated.

$100 billion! Five reasons investors are flocking to ETFs

It's not official, but Australian ETFs are clicking over $100 billion right now. It's a remarkable rise, leaving the traditional rivals, the Listed Investment Companies, in their dust. Why are they so popular?

Cut it out ... millionaires are not wealthy

The widespread use of 'millionaire' must stop. Inflation means that the basket of goods and services that cost $1 million in 1960 now requires $15 million. Today, millionaires are not wealthy.

A close look at retiree fears and expectations

Half of Australians retire early due to unexpected circumstances and within timeframes they did not choose, and two-thirds of pre-retirees worry about funding their retirement. But neither are the greatest fear in retirement.

Minister Jane Hume on SMSFs and superannuation reform

Senator Jane Hume presented at the SMSFA conference this week, and we reproduce the full transcript as a guide to what the Government is thinking on superannuation reforms as we head into the next election.

Latest Updates

Investment strategies

Dog-eat-dinner: a tough day in the life of a broker analyst

What do stock analysts do in reporting season, faced with hundreds of company reports? Take a look inside the secret world of broking and the analysts burning the midnight oil for a month, hoping for a special insight.

Shares

What drives Australian versus global equity performance?

We tend to think of the 'stockmarket' as one beast, but it pays to know the drivers of the different parts, especially global versus Australian stocks. The outlook favours global due to better sector exposure.

Shares

Invest in Australian value stocks before it is too late

By now, we know 'growth' stocks have outperformed 'value' for many years and investors look to the future, but there are good reasons why the switch is on, especially as value companies emerge from the pandemic.  

Shares

Gains of a lifetime reward new retail investors

Nobody knows how to pick the bottom of the market, but new investors did well in 2020. They captured most of the returns since the lows, and contrary to popular opinion, they are not punting away on tech stocks. 

Investment strategies

FANMAG: Because FAANGs are so yesterday

FANMAG returns have been strong but not relative to their predecessors. Looking at a broader group of large tech companies, most have lagged the market. Fad-based investing is no substitute for broad diversification.

Overdue overhaul of Australia’s aged care system

To support a better aged care system appropriate to the needs of all Australians, critical changes are needed including a new financing approach. The current system has failed seniors, carers and providers for years. 

Shares

‘Super-defensive equities’ may rescue struggling 60/40 portfolios

The 60/40 portfolio has been the mainstay of 'default' Australian investing, but large allocations to bonds compromise returns when rates are low. Strategies with exposures negatively-correlated to equities are needed.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.