Reason for credits is long gone

FRANKING CREDITS

THE truth about the franking credit (or imputation system) is that it gives a tax refund to an individual in respect of profits on which they paid no tax. Zero. It’s not a refund but a gratuity, and the way it operates is far removed from the original intention of the government that introduced it in 1987. Then, the company tax rate was 49 per cent. If a company had a profit of $100, it would pay company tax of $49. When the remaining $51 went to shareholders, many were taxed at the top personal rate of 60 per cent. In consequence, $80 of $100 profit was paid in tax, whether company or personal. This was considered a disincentive to investment. The credit put a ceiling on the tax payable on company profits, the higher of the company tax rate or shareholder’s personal rate.

In 2019, company and personal tax rates are significantly lower and the system has been inverted. The ceiling is now the lesser of the two rates. Accordingly, the rationale for the credit no longer exists. It has gone from an investment incentive to a luxury that largely benefits wellto-do people, which the country cannot justify given shortfalls in health and education funding. It is a refund to people who paid no tax on the profit and certainly cannot be described as savings. a minimum nil tax on other income types. Shareholders own the company, therefore company tax is really tax paid on the shareholder’s behalf; the shareholder can only receive 70 per cent of company earnings as dividends. This is most relevant in a self-managed super fund (in pension phase — nil tax) as income from property and cash deposit investments will be at a 30 per cent advantage to share investment income. For the SMSF (in accumulation phase — 15 per cent tax) there will be a 15 per cent advantage. For individual taxpayers the discussion is the same, depending on the marginal tax rate. If Labor has issue with low tax rates they should have a policy that will apply to all income types and not just dividend income.

Charity doubt

IT is interesting how often those untaxed retirees complaining about the prospect of losing their franking credit rebate state they will no longer be able to make charitable donations. I wonder whether they have spared a thought for other retirees on far lower incomes who have been giving to charity for years with no expectation of getting any tax top-up. Jim Heys South nipaluna/Hobart

Business disadvantage

BUSINESS can trade as a company, trust, partnership or individual. Trusts and partnerships distribute income at the end of the year it is earned. They do not pay income tax in their own right (but trusts may pay income tax on profits not distributed Will Premier put more in public sector piggy bank? The Premier isn’t a bad bloke at all and he’s in a good position to raise the pay level for all Tasmanian public servants. for legal reasons). Distributions end in the hands of individuals, who pay tax on a sliding scale depending on taxable income. Companies do not have a requirement to distribute income at the end of the year in which it is earned. They pay income tax at a fixed rate. Such income tax payments become imputation credits attached to dividends later paid to shareholders. Dividends paid to shareholders form part of taxable income in the year paid.

The prepaid income tax paid by companies transfers as imputation credits to the shareholders, who pay income tax at the rate determined by their taxable income. If shareholders are not allowed to claim imputation credits as prepaid income tax, company income is effectively taxed twice. Businesses structured as companies are disadvantaged under the Labor plan by having income taxed twice. Companies will save income tax if they restructure to become trusts or partnerships.

Double standards?

I HAVE been trying to follow the debate on tax refunds for franked credits. The Government is going in hard to make sure these mainly self-funded retirees, many with million-dollar plus account balances, retain these cash refunds on their shareholder franked credits. Compare this to the treatment of thousands of retires by the same government, on January 1, 2016, stripped away some if not all of their part government pension, because these people had entered into a Defined Benefits Scheme on retirement. Double standards?

The K&D ward

HERE is a thought for the Government. Buy the K&D warehouse site and build a specialised hospital for elderly or cancer patients. It may free up some beds at the Royal Hobart Hospital. Perfect site for visiting unwell patients.

Empty detention centre

WHAT if they opened a detention centre and nobody came? The reopening of Christmas Island has changed the Prime Minister’s efforts to scare the Australian population witless from simply ridiculous to ridiculously expensive.

Traditional owners

PERHAPS the best solution to the discussion about the cable car would be to give the mountain back to the traditional owners and let them decide the future of this magnificent mountain and its surrounding bushland.

Money management

THE Liberals berate us that they are the only ones who know how to manage money. If Mathias Cormann is the standard of management, then we are in trouble.

Lake Malbena decision

WILL the State Government simply override the decision of Central Highlands Council if it doesn’t deliver the desired outcome on the Lake Malbena issue? You know, like they did with the HCC’s decision on the cable car application.