Should we change the company tax rate?

A good compromise to fix the franking problem would be as follows.

Company tax for large companies 30%
Company tax for medium companies (as now) at 25%
Company tax for small (eg family or single proprietor companies ) 20%

Franking credit on all company tax paid would be passed on at a maximum of 20%.
So for a $100 profit earned by the large company, investors would get $70 plus franking of $20. This would be treated as currently, so $90 is added to your income and $20 tax rebate applies. The ATO gets to keep the remaining $10.
For a medium company the ATO keeps $5 , so you get $75 plus $20 franking and declare $95 income.

And for small companies, all tax paid is available as franking credit. This avoids penalising small enterprises where an individual or family prefer a company structure to a trust or sole trader structure - they still get back all of the tax they paid as a credit on their personal income tax.

This would seem a good compromise. Most investors would accept it, it is simple, similar to the current system, and it would raise a good deal of revenue for the government. It would also encourage investment in small and medium companies over large companies, as investors would receive more of the profit.

Re JohnS comment. This used to be the system until Costello abolished it. The taxable portion of an income stream was taxable income with a 15% rebate. The way around this, of course, was doing reconstruction strategies to reduce the taxable portion. This used to be difficult as it had to be done by age 65 but now that you can do it to age 75.

Going back to the original concept is one of the easier ways to make the system fairer, along with getting rid of another Costello innovation of not having to convert your super into an income stream ever (again this used to have to be done at age pension age, whether working or not).

It’s hard to see what that would achieve. The 15% tax rebate would make an effective tax-free threshold of $65,000 for a super pension withdrawal, when the bottom marginal tax rate is 14% in 2 years time. And that tax-free threshold only applies to the taxable portion of the withdrawal. Even a pension of $100,000 (from a fund worth $2 million) would only have an effective tax rate of 5%.

Larger funds are likely to have more non-concessional contributions and therefore lower taxable proportions and, as you point out,retirees can easily lower their taxable proportions by using a re-contribution strategy up to age 75.

That is a convoluted way of saying the tax arrangements on super fund withdrawals before Costello didn’t collect much tax and would not collect much tax now. That’s why it was easy for Costello to get the political gain for very little fiscal pain. Importantly, no government since that time has wanted to reverse those changes because it would bring in very little tax and would burn a lot of political goodwill.

Also on the subject of company tax rate is the different rate depending on source of income and company turnover. Unnecessary.

If there were no company tax, foreign investors would pay no tax in Australia.
This statement is incorrect as they would pay withholding tax
• 10% for interest, regardless of whether a tax treaty is in place
• 15% for unfranked dividends and royalties where there is a tax treaty in place
• 30% for unfranked dividends and royalties where there is no tax treaty in place.

we need to think of franking credits like PAYG tax from our wages.

With wages, the employer estimates what the tax the employee will be required to pay, and deducts it from the employee's wages. Then, the employee puts in their tax return, and the correct tax is determined. If the employer deducted too much, then there is a refund, if not enough then the employee has to make up the shortfall.

With dividends, the company estimates what the tax the employee will be required to pay (a flat 30%, the corporate tax rate), and deducts it from the shareholder's dividend payment. Then, the shareholder puts in their tax return, and the correct tax is determined. If the company deducted too much, then there is a refund, if not enough then the shareholder has to make up the shortfall.

If you look at imputation this way, then refunding of imputation credits makes total sense

Well said, JohnS. Whenever I hear otherwise intelligent people raging about franking credit refunds, I always ask if they've ever received a tax refund. Pretty soon they've got their hands over ears saying "waa waa I'm not listening franking refunds baaaad". It's an otherwise unassailable argument :)

We could probably extend the process a bit further.

Instead of making super pensions tax free, tax the income.

BUT

Give the pensioner credit for the tax already paid.

There are two components of a super balance. The money that was contributed from after tax money, and the money which was taxed when it went in and the earnings (at 15%)

The after tax contributions should come back to the pensioner tax free, no problem there

The other component, tax it as income, but treat the 15% tax already paid as an estimate of the tax that the pensioner will eventually paid. Treat it the same as PAYG deductions and as company tax. Treat it as prepaid tax by the pensioner.

The result, given the current tax scales of $18k tax free, next $27k taxed at 15%, next $90k taxed at 30%.

So someone taking a taxable pension, with the 15% treated as prepaid tax will get about $50k and have no extra tax to pay. Less than $50k and you get a tax refund. More than $50k, there will be some tax payable. And you can get the after tax contribution money back tax free.

People will need to have about $1m in super to be responsibly drawing a pension of $50k (and as a couple that could be $100k)

Those with big super balances will draw more and pay tax - as a bonus, the need to limit the amount of pension balances and the additional tax on super over $3m won't be necessary, it will all automatically be taken care of.

You could even "sell" the idea of taxing super in pension mode at 15%, because the pensioner would get the tax paid back when they put in their tax return.

This idea brings PAYG, company tax and super tax under the same principle.

"Instead of making super pensions tax free, tax the income.":
"This idea brings PAYG, company tax and super tax under the same principle.":

How to incorporate an Age Pension for the capital-less? Means Tested or Universal?