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.

 

 

  •   22 February 2013
  • 4
  •      
  •   
4 Comments
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%.

Angus Stephen
March 27, 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?

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?

Steve
March 08, 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!

 

Leave a Comment:

RELATED ARTICLES

Meg on SMSFs: Last word on Div 296 for a while

The Division 296 tax is still a quasi-wealth tax

Is it really ‘your’ super fund?

banner

Most viewed in recent weeks

Want your loved ones to inherit your super? You can’t afford to skip this one step

One in five Australians die before retirement and most have not set up their super properly so their loved ones can benefit from all their hard work and savings. 

Super is catching up, but ageing is a triple-threat

An ageing Australia is shifting the superannuation system’s focus from accumulation to the lifecycle of retirement. While these pressures have been anticipated for decades, they are now converging at scale and driving widespread industry change.

Has Australia wasted the last 30 years?

The 20 years after Peter Costello left Treasury have been deemed wasted...by Peter Costello. The missed opportunities for Australia began long before.  

The 5% deposit scheme is bad for homeowners and Australia

An ‘affordability’ scheme making the county more vulnerable to economic shocks and contributing to the deteriorating financial situation of everyday Australians.

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

3 ways to defuse intergenerational anger

With the upcoming budget increasingly likely to include bold proposals to alter the tax code I’ve outlined three incremental steps with fewer unintended consequences.

Latest Updates

Superannuation

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

Economy

Central banks need higher inflation targets

In a shift away from solely targeting low inflation, central banks are considering raising inflation targets to combat economic challenges, but face potential drawbacks and conflicts in policy implementation.

Exchange traded products

The missing 30%: how LIC returns are understated, and why it matters

The perceived underperformance of LICs compared to ETFs is due to existing comparison data excluding crucial information, highlighting the need for proper assessment and transparent reporting.

Latest from Morningstar

Alpha isn’t dead. You’ve just been measuring it wrong

New research shows smarter portfolio construction—not new factors—is the real edge in the hunt for alpha. However, finding it requires a fundamentally different mindset.

Investment strategies

The diversification illusion: why 'balanced' portfolios may be exposed

Many 'diversified' portfolios are increasingly driven by the same narrow set of forces. As concentration builds beneath the surface, understanding how portfolios behave - not just how they’re constructed - is critical for investors.

Investment strategies

The case for staying the course in credit

Rising oil prices and inflation pushed Australian yields higher. Markets expect further tightening, but weaker growth may reverse rates. Locking income and maintaining duration is a sound strategy for widening credit spreads.

Investment strategies

One risk after another

Investors often focus on front-of-mind risks, reacting to each headline event without considering long-term impacts. Cass Sunstein and Timur Kuran define this as an "availability cascade," affecting financial decision-making.

Sponsors

Alliances

© 2026 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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.