Double Taxation

Bill Shorten wants your money.

We all love that end of year tax refund, but wait, what if the government decided that they would keep your refund.

Well today on the 13/03/2018 this is exactly what Bill Shorten has proposed and the ABC is championing. But only in regards to those rich people who own shares, so you will not be affected right! Wrong! If you have money in Superannuation then this will affect you, you will pay more tax on this income so the government can waste it for you. It is called double taxation.

Double taxation is when a company pays tax at 30% and then pays a dividend to the shareholder, on which the shareholder will pay further tax on the dividend. For example just say the company make a profit of $100,000 and pays $30,000 or 30% tax rate on the profit. This leaves the company $70,000 in cash to pay to the shareholder. Let’s assume that the shareholder pays tax at the average rate of 25%. So they will include the $70,000 in their personal tax return and pay $17,500 or 25% in tax.

On the initial $100,000 earned the company paid $30,000 and the shareholder paid $17,500 so in total the tax paid on the initial profit of $100,000 was $47,500 or 47.5%.

In 1987 the franking credits system was introduced to stop the double taxation, however, it was not until 1 July 2000 that the franking credits became refundable. This put a stop to double taxation and ensured that everyone paid the right amount of tax for their income level.

Taking the above example, a company paying a $100,000 dividend and paying $30,000 in tax, the new system in 2000 allowed the cash and the tax paid (imputation credit) to flow through to the shareholder. The Shareholder would declare income of $100,000 made up of cash of $70,000 and the imputation credit of $30,000. The shareholder would then pay tax on the $100,000 at their marginal rate of 25% or $25,000. The difference between the Imputation Credit of $30,000 and the tax payable by the shareholder of $25,000 if paid back to the shareholder as a tax refund. In this case the amount being $5000.

Under the new proposal by Bill Shorten, this $5000 refund due to the shareholder would be kept by the ATO. The slogan that the ALP is using and the ABC is repeating is that no extra tax is paid, is completely false and fake news. If the shareholder is not receiving the refund then they are paying more tax. In the above example the shareholders tax rate goes from 25% to 30%. (Please keep in mind that above example is for illustration purposes only.)

But who will this affect?

Everyone who has investments in superannuation, your superannuation hold shares which pays dividends to rich and poor alike. It will affect everyone in the same proportion, the company tax rate is 30%, imputations credits are paid at 30% means that the government will keep up to 30% of your income.

Example

Frank has $1 million in an account based pension (account based pensions pay no tax) his income from this pension is a $50,000 fully franked dividend. His gross income is $50,000 cash and franking credit of $15,000 a total income of $65,000. As pensions pay no tax, Frank would receive a refund of the $15,000 franking credit. Under the new proposal by Bill Shorten Frank would lose this $15,000 and the government would keep it.

Bob has $300,000 in an account based pension (account based pensions pay no tax) his income from this pension is $15,000 fully franked dividend. His gross income is $15,000 cash and franking credit of $6,428 a total income of $21,428. As pensions pay no tax, Bob would receive a refund of the $6,428 franking credit.Under the new proposal by Bill Shorten, Bob would lose this $6,428 and the government would keep it.

Sure Bob has lost less in dollar terms but I expect Bob would feel the loss more than Frank.

This proposal should never get up as it will only serve to increase the tax Australians already pay and hurt middle class Australia.