ALP Dividend Imputation Policy – Some additional questions

Here is a link to the ALP’s dividend imputation policy; the policy that will remove cash refunds from franked dividends to a specific class of investors only.  It is a hit on Self Managed Super Funds and individual investors who are a not sufficiently poor to be on a pension and are not sufficiently wealthy to have other earnings.

According to the policy:

Charities and not-for-profit institutions, such as universities, are exempt from these changes.

Ok.  Fine.  Here are some questions.

  • Will Unions be exempt from this policy?  Unions don’t pay tax and could be classified as not for profits.  They also have reserves which would be invested which could get the benefit of franking refunds.  Will the CFMMEU be exempt?  Will the AWU be exempt?
  • Will political parties be exempt from this policy?  Political parties don’t pay tax.  Their investment foundations don’t pay tax.  They also have reserves which would be invested which could get the benefit of franking refunds.  Will the ALP be exempt?  Will the Liberal Party be exempt?  Will the Australian Greens be exempt?
  • Will not for profit political action organisation be exempt?  These organisations don’t pay tax.  Will GetUp! be exempt?  Will the Australia Institute be exempt?
  • Will schools (not universities) be exempt from this policies?  Will public and/or private schools which have reserves and who might have investments be exempt from this policy?
  • Will religious or quasi religious organisations be exempt from this policy?  Will the Church of Scientology be exempt?  Will the Mormons be exempt?  Will the Catholic Church be exempt?

Please Mr Bowen.  Can you please advise.

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24 Responses to ALP Dividend Imputation Policy – Some additional questions

  1. John Bayley

    As far as I can gather from whatever Bowen has chosen to release so far, the answer to all your questions appears to be ‘Yes’.
    Mind you, as Peter Garrett famously said, ‘once we get in, we’ll change everything anyway’.
    I don’t think much has changed since.
    Because ‘fair and sustainable’.

  2. jock

    I want to know when and where bowen met with trustees of industry super funds to discuss the structure of the policy. Alp trolls in the oz comments deny this but it seems too obvious. Bowen would not have thought out the exemption on his own.

  3. Mak Siccar

    Good questions. Answer: exemptions only for Labor’s maaaaaates!

  4. 2dogs

    Listed companies will simply respond to this by creating issuing debt securities that mimic their shares.

    Super funds will just buy these instead of shares. There will be no real benefit to government revenue.

    The only real change is that such debt securities have no voting rights. Which is what this is all about.

    Note that the union controlled industry funds won’t need to buy the mimic debt securities, and can still buy shares, as most of their members are still in the contribution phase, and can therefore get the full deduction. It mainly effects retail funds and SMSFs that are mostly in the pension phase, moving them to the voteless securities instead.

    This is all about ensuring union control of corporate boards. There will be no significant benefit to government revenue from this measure.

  5. Karabar

    Mr. Bonehead is simply unable to contemplate such questions.
    But they do not address the point.

    A shareholder is one of many owners of an enterprise.
    When the enterprise produces income, it pays tax and some of the remainder is distributed to the owners.

    A tax on income has already been paid. It is not necessary that this tax on income be paid a second time. Whether or not the shareholder pays tax on other income is immaterial.
    That is the point.

  6. Tel

    Note that the union controlled industry funds won’t need to buy the mimic debt securities, and can still buy shares, as most of their members are still in the contribution phase, and can therefore get the full deduction. It mainly effects retail funds and SMSFs that are mostly in the pension phase, moving them to the voteless securities instead.

    Is there a way to create a secondary market reselling shares somehow between SMSF’s in such a way as to distribute the deduction onto someone who can use that? Maybe I can invent an app or something.

  7. 2dogs

    Is there a way to create a secondary market reselling shares somehow between SMSF’s in such a way as to distribute the deduction onto someone who can use that?

    No. The easiest and cheapest way around the financial liability is for companies to issue mimic debt. Any other solutions would underperform relative to such debt.

    In general, SMSFs won’t care about losing their voting rights, as they never really had control anyway. The retail funds might be disappointed at losing voting rights, but it will be far more important for them to stay fully deductible, because they will lose return and customers if they don’t. So they will chose to buy the mimics.

  8. Jock

    Tel, Im afraid dividend stripping or transfering franking is against tax law.

  9. Pyrmonter

    It’s capricious – which troubles me; but … will it matter?

    The effect of full dividend imputation is that returns to capital are taxed at the marginal tax rate of the taxpayer, which, if zero, means they’re untaxed. Removing the payments means we have only partial imputation. However, resident subscribers for interest bearing debentures who disclose a TFN who face a zero marginal tax rate will be untaxed at the company level (interest payments are deductible) and also not taxed at a personal level – so debentures serve as a tax effective means of capital raising by the company. Expect to see more advertisments along the lines of ‘Estate Mortgage – High Returns, Nice and Safe’ … and down the road, more work for those in Pyrmonter’s profession (insolvency) … but little if any sustained increase in tax collections. At least until the brainiacs in Bowen’s office light on another group of coalition-voting taxpayers to gouge.

    Am I missing something, @ TAFKAS / @ TimNeilson?

  10. John Bayley

    ‘Estate Mortgage – High Returns, Nice and Safe’

    Now you brought back some pretty old memories!
    I remember that this particular one (Estate Mortgage) even had a ‘bank guarantee’!
    And it paid 18% interest…until it didn’t.
    Those were the days…State Bank SA/VIC etc etc.

  11. Zulu Kilo Two Alpha

    Those were the days…State Bank SA/VIC etc etc.

    Rothwell’s in Western Australia – bailed out by the long suffering taxpayer…

  12. jock

    You all beed to realise that companies cannot come up with easy solutions. The tax bureacrats have been all over convertibles; perpetuals, options and every other hybrid that could be thought of. The rules now delineate debt and equity. And i can assure you they can and have won cases disallowing interest deductibility. There is also thin capitalisation rules that linit debt for foreign companies. There is disallowance of the deduction for interest if the interest rate is in their view above market. Before imputation companies tried to reduce tax. With imputation paying tax was not as bad but other issues arose. Now companies could be back to not wanting to pay tax. Interesting world.

  13. Petros

    Will this prompt more Australian companies to move offshore? Pay the Singapore-(or other low tax jurisdiction) based headquarters a nice large fee and minimize any Australian profit. No doubt the big guys have already done this but there must be a large number of SMEs that have not bothered to (yet).

  14. 2dogs

    jock, the mimic debt I am suggesting is perfectly legal.

    Yes, there are thin capitalisation rules, but as you say, they are for foreign companies. But obviously, foreign companies are listed on foreign exchanges under foreign jurisdiction, not the ASX. They aren’t distributing franked dividends to Australian super funds in the first place. It is Australian listed companies that have this problem, and they are the ones that will be issuing the mimic debt to get around it.

    And obviously, as the mimic debt will be marketable securities, its interest rate can not possibly be above the market.

  15. jock

    2dogs. It is not as simple as you think. Listed trusts like spark have been subject to extensive audit and court cases by the ato over interest deductions on loan notes issued to shareholders.

    On the other hand listed trusts that can “pass through” income and not pay tax because it is all distributed may become more prevalent. Thats if bill doesnt kill them off too.

    Note that only a proportion of investors will be impacted by these changes ( smsf and low taxed investors). The only other investors who are impacted by imputation are foreigners. They dont get the benefit.

    Treasury has wanted to get rid of imputation for years. They see it as an impediment to making the tax system more like others internationally. Rationally from this it can be inferred that they want to double tax. But they also want lower tax rates. Funny enough lower corporate tax rates reduces imputation anyway.

  16. Tel

    Tel, Im afraid dividend stripping or transfering franking is against tax law.

    How can it be though?

    Suppose an SMSF sells the share back in to the market before the dividend comes due, but buys the same share after the dividend is paid. That’s got to be legal, and in almost every case will yield a reliable profit. I would be guessing that foreign owners of Australian shares already do that. What’s the ATO gonna do? Make the entire stock market illegal?

    What’s legal for the stock market in general must surely also be legal for any other market that serves a similar function.

  17. To sell and buy back crystallises cgt. You assume also the efficient market hypothesis and that every investor values franking credits equally.

  18. Jock

    Tel you are correct. But the transactions must be at risk. It means you are open to tax on any profits as holdings will be for less than 12 months . in fact each shareholding would need to be sold and repurchased every six months.

    Just to show you how far the tax law goes, see the attached with respect to ;
    the holding period rule
    the related payments rule
    the dividend washing integrity rule
    https://www.ato.gov.au/forms/you-and-your-shares-2013-14/?page=11

  19. Tel

    To sell and buy back crystallises cgt.

    Hardly a problem to self-managed pensioners who weren’t paying regular income tax to begin with.

    If they were paying income tax, none of this question would come up in the first place.

  20. Tel

    … the dividend washing integrity rule …

    That’s a good link to know about. Stupid though, because they make it 45 days and if everyone knows this time period, the price simply adapts to the ruling. These guys are flipping morons, their only advantage is they can invent rules (generally bypassing Parliament) faster than regular people can read these rules.

    The dividend washing integrity rule does not apply if you:

    * are an individual, and
    * received no more than $5,000 in franking credits during 2013–14.

    However, the dividend washing integrity rule applies where dividends flow indirectly to you through your interest in a trust or partnership.

    Seems they are letting the little guys cash in on the transfer while making it difficult for anyone to run a business out of it. That’s even better to know … thanks!

  21. Rococo Liberal

    WHy can’t we adopt the US system whereby all small companies do not pay tax on profits, but shareholders pay tax at full marginal rates on the dividends

  22. Pyrmonter

    @ Rococo Liberal

    That is, roughly speaking, the effect of the full dividend imputation system. However, our pusilanimous coalition MPs are reluctant to consider reducing the marginal tax rates of the ‘rich’ (read, upper middle class) earning 200k; how much stomach do you think they have for campaigning to abolish the (formal) corporate income tax? As for Labor and the Greens – they’re the kernel of the problem, the people for whom tax policy is all about distribution (or, if they have free choice, not).

  23. Tator

    Bowen’s own press release is full of lies that are easily proven to be false. He states

    Under Labor’s plan:
    o No one will pay a single cent more tax
    o No one will lose a single cent from their super contributions
    o No one will lose a single cent from their pension
    o No one will lose a single cent from their share dividends.

    Yet those who do not have a tax liability will effectively be paying tax at a rate of 30% and losing 30% of their share dividends due to these changes. These Morons just do not understand the way Corporations work within the tax system as Corporations ARE THE SHAREHOLDERS and not the staff nor board.

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