Dividend Imputation

The Dividend Imputation System (DIS) was introduced in Australia in 1987 by the Hawke/Keating government. Its intent was to stop the double taxation on company shareholder dividends.

Prior to DIS companies paid tax on their profits and then shareholders paid personal income tax on the previously taxed profits distributed to them. That is, the profit earnings were taxed twice. To illustrate this in today’s terms, a profit of $1,000 would be taxed at 30% at the company level leaving a net profit of $700 for distribution to the shareholder. At a personal income tax level of 30% this would attract in a further tax of $210, resulting in a total of $510 or 51%.

In the above example, the shareholder (part owner of the company) with a personal marginal tax rate of 30% has been penalised by a 21% increase in the tax applied on top of their profit entitlement. If the person in the above example was on a 47% tax rate, the total tax becomes 63%. In the case of superannuation pension accounts whose earnings are tax free, the members share dividend earnings are reduced by 30%.

Despite claims to the contrary, many countries throughout the world have a DIS, or versions of it, to avoid double taxation. Other countries don’t tax companies at all and only apply tax at the shareholder level.

DIS is not just a perk for the wealthy. All adult Australians will be impacted if the DIS is abolished. Moreover, the worst affected in percentage returns will be low income earners, superannuants and self -funded retirees.

Capital Gains Tax (CGT)

Capital Gains Tax in Australia is complex in nature considering elements like depreciation allowances and capital expenditure offsets. But I’m going to focus on the issue of discount applied to assessable capital gains on the sale of an investment asset.

Historically, the CGT system has acknowledged that taxable capital profits should consider the annual increase in Consumer Price Index (CPI), otherwise known as inflation. This is a recognition that the value of money decreases proportionately by the increase in CPI and therefore the value of a capital profit over time also decreases in value proportionately to CPI. In other words, the discount applied to taxable gains is a recognition of the “true” profit after taking inflation into account.

Originally the method of calculating taxable capital gain was to apply an annually adjusted index based on the CPI applicable over the term of ownership of the asset. This became too complex and the 50% reduction discount was introduced instead.

This CPI index is fair. Again, this is not a tax concession exclusive to the wealthy. Australians of all means are enthusiastic property investors and the removal of the discount will have dire consequences pushing lower marginal rate taxpayers into higher tax rates. More importantly, change is likely to impact property investment, which could impact the availability of lower cost rental accommodation.

Governments of all persuasions seem too focussed on attacking the savings of hard working Australians who take responsibility for providing for their own financial survival. It is time for bi-partisan commitment to fairness.