Memo to Kohler: Argue for tax cuts

Alan Kohler is railing against dividend imputation:

It’s hard to imagine anything more bittersweet for a nation than franked dividends.

They are pouring more than $50 billion a year of beautiful, largely tax-free income into the hands of the deserving well-off and helping them lead comfortable retirements without relying on the government pension.

In fact, according to tax office statistics, the ATO is actually sending out billions in cash franking credit refunds to super funds in pension phase: in 2011 it was $2.5 billion, but it would be much more now.

Apart from the fact that it costs the Treasury a fortune, the nation’s investors have become obsessed with harvesting dividends and the companies with supplying them.

It costs Treasury nothing to return money it has no claim on to taxpayers. Unless Alan Kohler is really arguing for the return to double taxation on dividends.

There has been a lot of talk about increased dividends this year – as if it was a bad thing. From a corporate governance perspective, however, reducing the amount of free cash flow within large corporations is a good thing.

For Kohler the end game is this:

How about this for a positive idea: Australia can be entrepreneurial. The only way any economy grows is if the returns from corporate investment are greater than those from being passive. The system needs to favour entrepreneurs over landlords, risk-takers over rent-collectors.

Okay – but why argue for increased taxation? If you want more entrepreneurship – by that I think he means more small business – then lower taxes, cut red tape, cut green tape, reduce the size and scope of government.

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48 Responses to Memo to Kohler: Argue for tax cuts

  1. Bruce of Newcastle

    How about this for a positive idea: Australia can be entrepreneurial.

    Ah, so by taxing dividends AND taxing capital gains we are going to stimulate people to being more entrepreneurial?

    Kohler has been hanging around with ABC types too long. He now believes in fluffy-unicorn economics like they do.

  2. Alfonso

    Oh, so Al is a happy camper with 30% private company tax plus 37> 47% personal tax on received private company income as it passes to me the shareholder. Effective marginal tax rate of 67% minimum plus medicare levy.
    Try it champion, small business private company’s will be in chaos.

  3. tgs

    It’s almost like he has no understanding of capital market theory.

    If dividend imputation was removed he’d be the first to first to whinge about the massive increase in corporate indebtedness as companies shifted their capital structures towards debt and away from equity.

    How did this guy become a finance commentator?

  4. .

    They are pouring more than $50 billion a year of beautiful, largely tax-free income

    What? Tax free? There are no credits unless there is a tax paid upstream.

    He’s off his head.

    The LDP wants to treat all sources of income equally, tax them at a flat 20% and give individuals a 40k tax free threshold.

  5. H B Bear

    Imputed dividends are tax-free in the same way as the diesel fuel rebate is a subsidy.

    Fair dinkum – this reads like a Richard Dennniisss Australia Institute report.

  6. Sinclair Davidson

    I’ve accidently deleted a comment in the spam filter that looked legit on this topic. If you’ve posted something that hasn’t appeared please re-post.

    regards, Sinc

  7. Rob MW

    “The system needs to favour entrepreneurs over landlords, risk-takers over rent-collectors.”

    What a stupid load of bullshit. “Entrepreneurs” are usually, if not always, the landlords, the risk-takers AND the rent-collectors, otherwise they would be stealing someone’s property if they are not the landlord. Kohler’s description of an “Entrepreneur” makes them out to be fucking thieves who should be in jail.

  8. Myrrdin Seren

    If you want more entrepreneurship – by that I think he means more small business

    I doubt it, considering his pronouncements on TheirABC and over at Business Crikey.

    I presume him to mean government-mandated behemoths like TheirABC, steered by the firm hand of the entrepreneurial Mark Scott, to put as much private media out of business as possible.

    And don’t forget guaranteed returns to union controlled super funds for entrepreneurial success stories like desal plants, wind turbines and geothermal energy.

  9. Dr Faustus

    The system needs to favour entrepreneurs over landlords, risk-takers over rent-collectors.

    landlords“? “rent-collectors?” Surely he is talking here about sources of at-risk equity capital. Equity investors who stand to lose anything up to all of their investment.

    From where I sit as an entrepreneur/risk-taker, the only way that I can do my entrepreneurial, risk-taking thing is by tracking down people who are prepared to tip some dosh into my account to spend on risky business. Unfortunately, these ingrates demand a return on their investment commensurate with the risk they are taking themselves.

  10. Bruce of Newcastle

    I’ll add that Darryl Dixon had an excellent article in the Weekend Oz which explains in good detail why franking credits should be retained.

    Don’t fiddle with franking credits

    I’ll also add that removing them probably would not increase real tax revenue anyway, since at the moment the dividend imputation system actually encourages ASX companies to declare higher profits, so they can give out franked dividends that shareholders like. Take it away and their incentive will be to reduce their taxable profit, for example by issuing hybrid instruments to investors – where the high ‘bond interest’ is deductible from their profit before tax, and the investor pays the same tax as if it was an unfranked dividend – but the company’s payout now is larger because it is made before tax. Only then overseas investors would qualify too, unlike dividend imputation where they don’t. So net tax the government gets is lower.

    It is really a dumb idea in every direction. Why doesn’t he advocate government spending cuts? That does the same thing without the employment of thousands more tax arrangement advisors, and every cut is a real cut whereas every tax rise is just another incentive for the advisors to find new ways of avoiding it.

  11. Eyrie

    As Mrs Eyrie said the other night while watching Kohler do his ABC news gig (not an everyday occurrence BTW) ” he should get his hand off it”.

  12. entropy

    Doesn’t Kohler understand the tax credit part of a franked dividend is crediting tax that has already been paid?

  13. Grey ghost who walks

    “Why doesn’t he advocate government spending cuts? ” Bruce of Newcastle at 12.19

    Yes! why doesn’t he? Kohler always reverts to the tired old left wing view and bangs on about increasing taxes and doing away with franking credits; when anyone with a brain would know that the use of franking credits goes a long way to handing back some of the extortion inherent in company tax. The reduction or abolition of company tax would make things hum.

    It would eliminate plenty of the bureaucrats that administer the farce currently.

  14. Milton Von Smith

    Kohler doesn’t understand dividend imputation. End of story.

  15. Milton, it’s also the end of his credibility – which has taken a bit of a hammering over the few years past.

  16. thefrollickingmole

    Heres the end game for the US… they are raising their taxes enough so moving offshore (or Canada anyway) is a reason to merger.

    http://www.forbes.com/sites/clareoconnor/2014/08/26/burger-king-and-tim-hortons-make-it-official-merge-to-form-third-largest-fast-food-company/

    Burger King and Canadian coffee chain Tim Hortons announced their merger on Tuesday morning, with the two joining forces in a much-discussed tax inversion deal to become the world’s third-largest fast food chain behind McDonald’s MCD +0.57% and KFC.

    So taxing at 40% has consequences… who would have believed that?

  17. rebel with cause

    … cut red take

    Some would say the red takeover is already complete.

    [Thanks. Sinc]

  18. Alfonso

    Why stop at double tax, why not triple tax small business company income, Al old mate, it’s a Statist’s dream.
    In addition to cumulative company and personal income tax we can impose an annual ‘retained wealth tax’ on undistributed after tax company earnings. That should sort those capitalist running dogs right out.

  19. Tel

    The system needs to favour entrepreneurs over landlords, risk-takers over rent-collectors.

    Wrong. The system doesn’t need to favour anyone in particular… I hate journalists telling me what we need, when it’s only their silly opinion anyhow.

    Risk taking can lead to new things, but risk taking is risky. That doesn’t automatically make it a great idea to take risks, some will want to, others won’t. Simple consistency and good management can also be valuable. Which approach is more valuable cannot be determined in advance, certainly not by government, nor by some random journalist.

  20. DaveR

    I agree with many comments above on the reason for Franking Credits….

    Has Alan Kohler conveniently forgotten that Franking Credits were introduced to end double taxation of dividends in the hands of shareholders – dividends paid out of after tax funds by the company?

    Or is Kohler seriously trying to claim that these returns to shareholders are somehow not taxed on their path to the dividend cheque (actually EFT these days)?

    A strange argument to run, but if you spend long enough in the ABC then maybe you start to think like this? Time for Alan Kohler to move on.

  21. “Let’s double-tax pensioners!”

    With thinking like that, he could have been a Gillard-government advisor.

    The ideas people come up with are just so infuriatingly moronic – but somehow, they always seem to get a core group of true believers parroting the same tune. Can you imagine the disastrous effect this would have on investment?

  22. “Landlords shouldn’t be able to take rental income… all rents should be re-invested into the property.”

    I say the above in jest, but it wouldn’t surprise me if some moron agreed with it.

  23. .

    Has Alan Kohler conveniently forgotten that Franking Credits were introduced to end double taxation of dividends in the hands of shareholders – dividends paid out of after tax funds by the company?

    Ah Dave. You poor lamb.

    The real question is “Did he ever know?” or “Did he ever have the capacity to understand?”…

  24. papachango

    They are pouring more than $50 billion a year of beautiful, largely tax-free income into the hands of the deserving well-off ….

    FMD – the ‘well off’ – as in anyone who has a super fund with shares in it?

    ….and helping them lead comfortable retirements without relying on the government pension.

    Double FMD. Like having a comfortable retirement is a bad thing? Does kohler want everone to rely on the government pension instead?

  25. Infidel Tiger

    Double FMD. Like having a comfortable retirement is a bad thing? Does kohler want everone to rely on the government pension instead?

    We can’t all sell a glorified mailing list to some wood duck at News Corp for $30 million, Alan.

    Cut us some slack.

  26. Mick of Brisbane

    They sound like the words of someone who’d typically be indignant on hearing that somebody may earn more than another.

  27. Mick of Brisbane

    This can be construed in ways that Alan won’t like:

    The system needs to favour entrepreneurs over landlords, risk-takers over rent-collectors.

    Rent-collectors?
    Gosh, that will cover a lot of the no-added value types typically associated with government and its legislation.

  28. Squirrel

    “The only way any economy grows is if the returns from corporate investment are greater than those from being passive” – good point, and that’s an argument for what we have at present – i.e. higher returns from equities than from sticking cash into a term deposit or cash management account with a bank.

    If Mr K has concerns about the amount of money going into property investment/speculation, attacking dividend imputation is an odd way of tackling the perceived problem.

  29. Leigh Lowe

    Kind of on topic and kind of not …
    Telstra announced a share buy-back recently at discounts to be tendered at between 6% and 14% to market, with the sweetener being that about half the buy-back price is a fully franked dividend.
    These are normally a no brainer for taxpayers with low marginal tax rates or super funds (15% tax rate).
    However, according to my sums, I reckon this one is marginal for a super fund in accumulation phase at any discount level higher than 9% – 10%.
    Obviously, it would be better for someone on a zero tax rate (eg pension phase super funds).
    Even though it is marginal, I’ll bet it is over-subscribed to the hilt at the full discount of 14%.

  30. 2dogs

    What is the alternative being proposed here?

    If its to require companies to fully attribute income to shareholders, or to tax them like partnerships or trusts, ok.

    If it is for just cancelling franking, then we are back to double taxation again. So we will be back to leveraging again, since interest only gets taxed once. I imagine prescribed interest debt securities, that are equities in all but name, will be all the rage.

  31. Rich

    This implies 2 things:

    1 That anything that isn’t taxed is a ‘cost’ (despite being already taxed – therefore all our funds should flow to government for redistribution)

    2 That tax is good

    Who is this nit?

  32. johninoxley

    Gave up on Kohler 10 years ago, he gives the same reasons for an event whether it is good or bad

  33. hammy

    Dividend imputation is the worst scam ever introduced into corporate taxation. Effectively shareholders pay no tax on their share investments. Even pensioners have to include their pensions in their taxable income. Incredibly inequitable.

  34. Tel

    Leigh Lowe
    Kind of on topic and kind of not …

    Not entirely off topic, I do see it as a bit nutty that buying or selling an asset should be conditional on your tax bracket. What sort of economic calculation is that? We have become so instinctive about optimising around government interference we no longer see how screwed up it is.

  35. Zulu Kilo Two Alpha

    Effectively shareholders pay no tax on their share investments.

    CRAP – This particular shareholder pays the difference between the thirty cent in the dollar covered by the imputed credits, and the going rate of income tax applicable. Do learn the basics of financial management before you be-clown yourself on the Cat.

  36. wreckage

    Kohler wants to increase investment in economic activity relative to land ownership, by making land ownership YET MORE tax efficient than market investment.

    KOHLER YOU ARE AN INNUMERATE FUCKWIT.

  37. Grey ghost who walks

    Hambone at 8.10

    You got it half right for a change; yes! “Effectively shareholders pay no tax on their share investments.”
    So what you idiot. Would you rather that an investor should have to pay their tax twice on their investments in a company?
    What a dill you are.

  38. hammy

    Grey Ghost, I’m amazed you think it’s OK that shareholders pay no tax, when even age pensioners have to pay tax on their pensions. Have you no conscience?

  39. .

    hammy
    #1432308, posted on August 28, 2014 at 8:10 pm
    Dividend imputation is the worst scam ever introduced into corporate taxation. Effectively shareholders pay no tax on their share investments. Even pensioners have to include their pensions in their taxable income. Incredibly inequitable.

    You are incredibly stupid, this is error ridden horseshit. Just give it up hammy.

  40. Zulu Kilo Two Alpha

    You are incredibly stupid, this is error ridden horseshit. Just give it up hammy.

    Not even satire or wit, Hammy. Just plain ignorance. Give it away.

  41. Tel

    Grey Ghost, I’m amazed you think it’s OK that shareholders pay no tax, when even age pensioners have to pay tax on their pensions. Have you no conscience?

    Shareholders are paying tax at their marginal rate, same as pensioners, for that matter they are often the same people anyhow. Have you no clue?

  42. Alexis

    Hammy is just joking (very badly and not humorously)

  43. Alexis

    Kohlers article could have been written by a parody troll like hammy from beginning to end. That’s the scary thing.

  44. Leigh Lowe

    Dividend imputation is the worst scam ever introduced into corporate taxation. Effectively shareholders pay no tax on their share investments. Even pensioners have to include their pensions in their taxable income. Incredibly inequitable.

    Do some reading and buy a calculator dickhead.
    The effect of dividend imputation is that the tax on dividends is adjusted to the shareholders individual marginal tax rate. So, if the corporate tax rate is 30% and my marginal tax rate is 46.5%, I pay an additional 16.5% tax on the dividends, after getting credit for the corporate tax ALREADY PAID.

  45. Bronson

    Maybe Kohler moonlights as Hammy or is it the other way round?

  46. Zulu Kilo Two Alpha

    I pay an additional 16.5% tax on the dividends, after getting credit for the corporate tax ALREADY PAID.

    Don’t confuse Hammy with facts – anyone who posts using the avatar of the most ineffectual Labor Prime Minister Australia ever had – not the most incompetent – just the most ineffectual – can’t handle facts.

  47. 2dogs

    hammy, Keating introduced dividend imputation. Do you really think he would introduce something like what you are railing against? Is it just possible that you don’t understand it properly?

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