Taxation Law

This document discusses the significance of a proposed tax policy amendment in Australia that aims to remove tax refunds on excess imputation credits. It explores the impact of the policy on key stakeholders such as retirees, superannuation funds, and accountants. The document also examines the pros and cons of the policy and its implications for accounting firms and the Australian Tax Office. References are provided for further reading.

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1. Why is this tax policy issue significant? (123 words)
Under the current dividend imputation system, a company has the right to pass on the
credit of the tax it has paid off its profits while they issue dividends to shareholders. The
shareholders in return can claim a cash refund if the credit exceeds individual tax liabilities.
The Labor Party is proposing to remove the ability for individuals to get tax refunds on excess
imputation credits. The policy will automatically make imputation credit a non-refundable tax
credit by 1st July 2019. The proposal will however not apply for charities and non-profit
organizations. This proposal that has not yet been approved by law but if it is implemented
shareholders cannot claim cash refunds on imputation credits issued by the companies they
have invested in.
2. Who are the key stakeholders and how does this policy affect them? (375words)
The first group of individuals that are going to be negatively impacted by the policy is
retirees who like to hold their superannuation savings in a self-managed super fund (SMSF)
(IOOF - Helping Australians achieve financial independence since 1846, 2019). The
implementation of this policy will definitely impact negatively on the retirement system and
lead to the reduction of discretionary saving which is regularly referred to as the third pillar of
the retirement system (Arnold et al., 2014). There are indeed loopholes in the current
regulations that enabled people to mislead about the spending of an organization. The
consumption of an organization could be deferred to invest in local companies to sustain a
self-funded retirement scheme.
On an individual level, there will be no tax refund for implications credits issued during
dividends payments. The proposed amendments to the policy is fueled by the fact that not all

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retirees own shares but instead almost 80 percent of all stocks owned by retirees are only held
by 20 percent of the wealthiest retirees. The Superannuation payout has been tax-free since
2001, and it does not require one to declare their personal income tax return (Mackenzie and
McKerchar, 2014). The amendment plans to stop any tax refund to those people with no tax
liability implying that retirees will no longer get the refund after it is implemented. The
assumption in the proposed amendment is that a retiree who receives a full pension plus
dividends from invested stock cannot possibly be earning the states $18, 200 per year and if
this is the case then they must be earning a reduced pension or no pension at all.
The Australian Prudency Regulation Authority (APRA) funds that will be affected are
those that do not receive any external funds. This implies that they no longer file for income
tax and mainly rely on imputation refunds from the government as a source of income
(Cummings, 2015). Active funds file for income taxes as they receive new taxable funds on a
regular basis; hence they can continue to collect the credit tax refunds from the government.
A dormant fund, on the other hand, receives no taxable funds; hence they will not be entitled
to a refund under the new amendment.
3. Who are the winners and losers in relation to this tax policy, i.e. what are its pros and
cons from the point of view of the stakeholders identified in relation to question 2? (328
words)
Winners and losers
The dividend imputation credit reform was set up to avoid double taxation on corporate
profits. Change always has winners and losers. For retirees, they will lose the franking credit
if it becomes a zero taxation superannuation policy, but at the same time, the policy will be
able to tax rich retirees who have 0% tax rate margin instead of a 49% rate margin

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(Cummings and Ellis, 2015).It will bring about equality in tax payment. The poor will suffer
when the policy is implemented. The term poor refers to retirees with no other investments
that will offset in terms of taxable income then the individual will automatically lose the
benefits of franking credits. Both retirees and poor people will pay more in taxes.
Pros
There will be some winnings as the amendments are going to promote tax equality. Some
people pay zero percent tax which was not the initial intention when the policy was first
implemented. Retirees will be more attracted to property trusts that have unfranked dividends
implying that by investing in such a stock helps investors to avoid the policy (Inside Story,
2019). Accountants will get the chance to earn more fees from the advice they give clients.
Franking credits encouraged investors to buy more corporate stock which has helped to keep
the corporate debt in Australia very low. If the amendments are implemented, then investors
may be attributing to increase corporate debt
Cons
Accountants also risk reducing the rates with which they offer services to clients. The fee
is usually lower than the amount of tax paid, and if the tax becomes smaller, then the fee ill be
highly noticeable (Handley, Wright and Evans, 2017). The current situation shows that most
people do not look at the fees they are charges for accounting services for they pay huge tax
amounts. SMSF providers will surely run out of business for the most attractive aspect of this
funds was their ability to access franking credits.

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4. Assuming that you work for an accounting/tax practice, what would be implication for
your firm and its clients if the tax policy becomes law? (223 words)
As mentioned in the pros and cons of the policy amendment, accountants will have to
adjust their accounting fees depending on the amount of tax filled by each client. There is also
an increase in the number of activities that attract more charges (Paulsson, 2012). Clients will
more than likely have increased fees as further interpretation of the amended policy will be
required before they decide on what they want to do.
It will be up to the accounting firms to determine the amount of tax a client is supposed to
pay and how the franking credits will affect their clients once the amendment is made. One
main goal of having an accountant is always to be prepared and always updated to the policy
amendments by the government for these may always be aired on mainstream media.
Accountants have to keep clients updated to these policies and advise on what is required.
Both accounting firms and their clients will be affected by the proposed changes in terms of
the tax paid and amount of fees charges. Clients also engage an accountant so that they do not
have to worry about following all the taxation policies put in place by the government. It will
be up to the accountant to ensure that they follow the taxation laws (Juranek, 2018), and
maximise the clients return.
5. Assuming that you work for the Australian Tax Office, what impact would the tax policy
have on compliance work of the ATO? (311 words)
Immediately after the proposal is implemented in parliament, and it becomes the law, the
ATO with have to apply the policy in the next taxation period if the annual taxation for the
current financial year has already taken place. They will have to review SMSFs funds

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especially those that are dormant implying that they do not receive any external funds.
Retirees who pay 0% on taxation will all be monitored depending on the type of investment
they have made over the years.
Policy changes are never easy. The core policies of a dividend imputation policy is
contained in the Income Tax Assessment Act 1936 and Income Tax Assessment Act of 1997
(Thampapillai, 2014). The ATO does not make the policies but rather interpret and apply
policies that have been enacted by the government. Not everyone will be eligible for franking
credits like before which means the ATO will have to analyze all those who previously
claimed the credit refund and determine their eligibility for the refund and if not determine the
amount of tax expected from said individuals. There should be a very slight change in the
information filed in the ATO unless a client starts to sell his/her shares.
An amendment of ATO working policies will have to be effected so that all employees
are aware of the expected changes in the taxation law and how to check whether they have
been implemented on the taxation report they receive from individuals and businesses (Laffer,
2016). ATO is told when to start implementing the amended policy, and it is up to the tax
office to determine how it is done to avoid having any loopholes in the taxation system where
people can evade to pay taxes. ATO can also perform one of its mandate and interpret the
policy amendment to any public member who is directly affected by the policy changes.
NB
The tax fees a client pays is constant and it does not vary as the tax amount paid. When tax paid
decreases or increases the client will always complain of the fees they pay.
As for the in-text (LOOF), the reference has no author name hence we have to use the title in
place of the author name.

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References
Arnold, B., Bateman, H., Ferguson, A. and Raftery, A. (2014). Understanding Assurance in the
Australian Self-Managed Superannuation Fund Industry. SSRN Electronic Journal.
Cummings, J. (2015). Effect of fund size on the performance of Australian superannuation
funds. Accounting & Finance, 56(3), pp.695-725.
Cummings, J. and Ellis, K. (2015). Risk and Return of Illiquid Investments: A Trade-off for
Superannuation Funds Offering Transferable Accounts. Economic Record, 91(295), pp.463-476.
D'Ascenzo, M. (2014). Australian Taxation Office (ATO). SSRN Electronic Journal.
Handley, K., Wright, S. and Evans, E. (2017). SME Reporting in Australia: Where to Now for
Decision-usefulness? Australian Accounting Review, 28(2), pp.251-265.
Inside Story. (2019). The real story of Labor’s dividend imputation reforms | Inside Story.
[online] Available at: https://insidestory.org.au/the-real-story-of-labors-dividend-imputation-
reforms/ [Accessed 25 Apr. 2019].
IOOF - Helping Australians achieve financial independence since 1846. (2019). Australian
Labor Party tax reforms – dividend imputation credits. [online] Available at:
https://www.ioof.com.au/financial-advisers/news-and-insights/adviser-news/articles/may-2018/
dividend-imputation-credits [Accessed 25 Apr. 2019].
Mackenzie, G. and McKerchar, M. (2014). Tax Aware Investment Management by Public Offer
Superannuation Funds in Australia: Attitudes, Practices and Expectations. SSRN Electronic
Journal.

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Juranek, S. (2018). Investing in accounting advice. Information Economics and Policy, 44,
pp.28-46.
LAFFER, K. (2016). TAXATION REFORM AND IMPLEMENTATION IN
AUSTRALIA. Economic Record, 18(2), pp.168-179.
Paulsson, G. (2012). The Role of Accountants in issuing advice to potential and investing
clients. Financial Accountability & Management, 28(4), pp.378-394.
Thampapillai, D. (2014). The Income Tax Assessment Act 1936 S23AG and Double Tax
Avoidance Agreements. SSRN Electronic Journal.