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Money Matters Monday 19 March 2018

Posted March 21, 2018 by MoneyLink

Low Earners Need the Tax Refunds

The announcement by the Federal Opposition that it will cancel cash refunds of dividend imputation tax credits if it wins the next election has many people scratching their heads. It claims to represent low income Australians yet this policy, by definition, would affect them most.

The Opposition says the policy would deny tax refunds to wealthy individuals. A small number of wealthy people may be affected but the great majority would be people who aren’t wealthy, low earners, especially retirees.

What is Dividend imputation?

Dividend imputation was introduced by former Treasurer Keating in 1987 to eliminate double taxation of company profits. Suppose a company makes $100 profit. It pays company tax of $30, then pays the other $70 as a dividend to a shareholder.

Before 1987 the shareholder reported the $70 as income and paid tax on that profit a second time. Now taxpayers must still report the dividend as income but they get a credit for the $30 tax the company has paid.

So if they are high earners paying 47 per cent tax they need to pay 17 per cent extra tax. If they are in the 34.5 per cent tax bracket they will have to pay another 4.5 per cent. What about low earners who aren’t liable for any tax?

The impact on low income earners

Since 2000 they have been given a cash refund of the $30 tax credit. The Opposition plans to cancel this entitlement. This is the puzzling aspect. People who have moderate or higher incomes will get the benefit of the tax credit as they will have other income to claim it against.

However low income earners don’t have enough income to create any tax liability to claim the credit against, so if refunds are cancelled they will lose the benefit. In our example they will be $30 worse off.

Some well-off people do deliberately invest most of their money in Australian shares paying dividends with imputation tax credits, but if they are genuinely rich the dividends themselves provide a high taxable income which means they will be paying tax.

For every well-off person who loads up on franked dividend investments there must be ten or twenty low income earners, pensioners, and retirees just over the assets test cut-off, who get refunds of $100, $500 or maybe $1,000 per annum.

These cash refunds are especially valuable for part pensioners and people whose pensions were cancelled when the assets test was changed in 2016. They need to earn 7.8 per cent return on their investments to replace the pensions they lose due to having the savings.

In the current low interest environment that is very difficult with reasonable security. To have any chance of doing so they need the tax credit cash refunds.


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