Impact of ALP Proposal on Dividend Imputation Tax Policy

This article discusses the impact of the Australian Labor Party's proposal on the dividend imputation tax policy. It examines the significance of the policy for shareholders, the potential effects on transfer balance cap and tax reformations, and the stakeholders involved. It also analyzes the implications for governments, individuals, and investors. The article concludes with a discussion on the impact of the proposal on non-residents and the compliance implications for the Australian Taxation Office.

Running head: TAXATION LAW
Taxation Law
Name of the Student
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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................3
Answer to question 3:.................................................................................................................5
Answer to question 4:.................................................................................................................7
Answer to question 5:.................................................................................................................8
References:...............................................................................................................................10

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Answer to question 1:
The issue of dividend imputation tax policy is regarded as the significant policy since
its purpose is to cut down the taxing dividend twice derived from company profits. The
policy is regarded as significant for shareholders since the shareholders can reduce the burden
of overall tax policy by using imputation credits (Wood 2018). A tax concession was created
which allowed few taxpayers and members of superannuation fund to obtain cash refund
from ATO provided that their imputation credit goes further than the amount of tax owed to
them. Because of such modifications, among the OECD nations Australia is regarded as the
only country that has imputation credit system that is fully refundable. It is viewed as
concession that has achieved development a quicker rate and currently has higher cost to
budget which is greater than $5 billion each year.
According to the Australian Labor Party (ALP) cash benefit is regarded as too
generous. Nevertheless, it is very much not clear how the refundable amount would create an
effect on the transfer balance cap on SMSF from 2017. The policy is regarded very much
significant since ALP has made a positive proposal that it has no plans of eliminating the
dividend imputation system (Murphy 2018). This is can be viewed on the positive side
however there is an uncertainty which presently surrounds the dividend imputation system of
Australia. The dividend imputation policy has mostly favoured the domestic companies and
shareholders and it is viewed too generous as compared to the other countries (Dixon and
Nassios 2018). Among the five OECD nations Australia is the only nation that still has the
full dividend imputation system and it is regarded as the only nation that has cash refunds for
excess amount of credits.
The central problem that is surrounding the reformation is that the politicians and the
office-bearers wants to tamper with the possible reason of applying tax on the superannuation

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yet again (Murphy 2018). Customers that are having SMSFs are trying to work out a method
through which they can reduce the effect of transfer balance cap and other tax reformations of
2017. This implies that the added changes are about to come if the ALP is elected in the
upcoming federal election. The constant changes of imposing tax on superannuation has
inevitably effected the confidence of clients in the system reliability.
The proposal stated by the ALP explains that changes which was introduced during
2001 will be overturned, this means that the original dividend imputation system will be
restored back with effect from 1st July 2019 (Stilwell 2016). The main issue that surrounds
this policy is that the excess amount of imputation credits will not be any more paid in the
form of cash refunds.
To assure that the measures does creates any adverse effect on the recipients of
government pensions or allowances, the Australian labor party has explained pensioners
guarantee or a recipient will still be able to get the added credits from the dividend imputation
system in the form of cash refunds (Dixon and Nassios 2016). As per the ALP this policy is
vital in saving tax if it is elected in the upcoming election. The current dividend imputation
system is forecasted to cost greater than $56 billion to the federal government in the next
decade.
Answer to question 2:
The policy has some vital stakeholders which is given below;
a. Governments
b. Individuals
c. Investors
Governments:

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The ARPA funds is in all probability going to be effected by the pension funds of
older age because these funds does not receive any new contributions. In addition to this, the
SAFs and the SMSFs particularly those that are under the pension phase have for a long time
been the grateful recipients of cash refunds for extra dividends imputation credits since the
funds were introduced in 2001 (Kingston 2015). With 47.1% of the SMSFs funds were in full
or partial pension phase during 2016, as a result the cash refunds in this sector has been very
substantial. But a lot has been changed from 2017 because SMSFs have not got the similar
level of exemption under the current pension income which was applicable in the previous
tax years. Changes that have been made to retirement pension is not anymore exempted from
tax.
The retirement pensions is currently the issue of transfer balance cap of $1.6 million
(Nguyen 2016). Consequently, the SMSF which has received the cash refunds over the years
are not anymore considered taxable and there is more probability of using the extra amount of
imputation credits. As a result of this, numerous SMSF funds will be highly effected by tax
and relies on cash refunds to obtain returns that required close observations.
Individuals:
The policy reformations would highly impact the individuals. The battle of words has
mainly involved presently the ALP Opposition and Coalition Government relating to the
impact on individuals (Akhtar 2018). In the recent statistics released by the government
stated that 54% of the 610,000 individuals that receives the credits have taxable income of
less than $18,200 every year. The ALP has responded to inevitable reaction with the changes
to assure some sort of centre link exemptions for the recipients.
Investors:

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The new changes to dividend imputation system would result in distortions for the
investors. Changes in the franking credits is one of the primary issues of tax which the
managers of superfunds would take into the account when making investment and it is held
as significant considerations for self-managed super funds (McClure et al. 2018). For
investors the franking credits is regarded as the incentive of making investment in Australian
companies. Under new rules, super fund members would not be paying any tax and SMSFs
members while paying the retirement pension, if the balance is less than the certain specified
limit. It is worthwhile for investors to make investment in this funds of Australian companies
that would pay franking credits. However, it also implies that if cash is refunded on franking
credits then there will be an increase in tax by 30% on the SMSF and super funds to make
investment in the Australian companies. Therefore, the investors would be tempted to place
their funds anywhere else.
Answer to question 3:
The proposal stated by the labour cannot be regarded as a comprehensive tax
reformation policy. But in the absence of any form of substitute policies, the policy stated by
the Labor is piecemeal move towards attaining an equitable tax system. The proposed
changes will have effect on the wealthy retirees (Trad and Freudenberg 2018). Presently,
around 20% of the wealthiest retirees have approximately 86% of the shares which is held by
a section of older Australians populations out of super and from the SMSF around half of
those funds are currently moving in the direction of individuals that has the balance of more
than Aud $ 2.4 million.
Eliminating the cash refunds will be helpful for the individuals and superfunds to
raise approximately Aud $ 5 billion in a year as the added amount of revenue (Balachandran,
Henry and Vidanapathirana 2016). Approximately, around 33% of the funds will be paid by
individuals whereas 60% of the funds will be bourn by SMSF and the remaining amount of

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7% funds will be paid by the Australian prudential regulations authority that is regulated by
the superannuation funds.
During the year 2001, the cash refunds on franking credits was set up for the
shareholders that has the added amount of franking credits than the tax that is owed to the
shareholders. But, under the new superannuation rules it is understood that the pensioners
will be comforted from paying any sum of tax on their superannuation withdrawals (Davis
2016). With the rise in the number of people, there are also significant rise in the super
balance of those that retire. As a result increasing number of people become eligible for the
cash refunds on the unused amount of franking credits. The current system of cash refunds
results in high cost in federal budget as it stands greater than Aud$5 billion per year.
Nevertheless, abolishing the cash refunds on dividends will not be any more costless.
While on the positive side of the policy, the franking credit regimes is set up for
several good reasons. Its purpose is to bias the Australians to make investment in the
Australian companies. In real world, this will result the Australian firms to obtain high
amount of equity funding and remain less dependent on the debt funding that would
ultimately help in improving the financial stability (Murray 2016). The franking credit are
also helpful for the Australian companies to pay dividends rather than inefficiently hoard
cash or make investment in those projects that has the lower amount of returns. Hence,
abolishing the cash credits and keeping the franking credits for those that do not pay the tax
on income cannot be treated as ideal policy. It abandons the values where all the profits of the
company should be taxed at marginal rate of tax on income for investors. It helps in reducing
the incentives for pensioners to make investment in overseas companies and make investment
in Australian companies.

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On a critical note, the decision of not imposing tax on superannuation withdrawals
and raising the effective tax free threshold limit for Australian residents has led negative
effected the wealthy retirees to make contributions to government revenues that are relative
to the younger households (Balachandran et al. 2017). The complete proposal is yet to be
known and added explanation is presently sought by superannuation industry. Closing the
concession would help in saving around $11.4 billion for the government but this will only
effect the small portion of shareholders which hardly has any tax liability. The shareholders
who may be effected will have the capacity of adjusting their investment decision so that they
can limit any added impact from the policy.
Answer to question 4:
The most important thing to consider is that no other country have extended the
dividend imputation to non-residents. Franking credits or any equivalent from other countries
hardly has any use in Australia and the foreign residents will not have the benefit of
Australian franking credits. There are several different type of tax that is imposed on
businesses to raise fund in the superannuation system (Mayo 2018). Therefore, such
concession will result the rich populations and high income group to create large amount of
balance in super funds. Certain caps have been placed, this requires the high income group
people to use their funds of superannuation to reduce the tax and create large sum of capital
savings. As a result of such incentives, the objective of numerous high income group is now
to form an adequate savings in superannuation where they are successful in living off their
income to pool their money and capital gains as a result of rise in assets worth.
For most of the working people in Australia who are forming a suitable
superannuation balance, retirement will not only involve living off their earnings to save but
may also require cash out their assets as well (Melia, Docherty and Easton 2016).
Nevertheless for those that are wealthy individuals, the policy is created to allow them to

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recover their assets. As a result, if a person has sufficient amount of balances in savings, a
taxpayer will be able to live off their earnings solely and pass over the assets as tax free for
the future generations.
The impact of ALP proposal will differ considerably based on investor’s situations for
those that are zero percent taxpayers in Australia, there are high potentials of reducing the
total yields and income. This is particularly suitable for those products that aims to increase
the franking credits and have higher average (McLaren and Cormick 2018). The extent to
which the policy would turn into law is yet to be known and it is largely dependent on the
wide range of variables. However, the environment and overall opinions regarding the
franking credit has certainly changed in the last few years.
Finally, it is very much difficult to conduct a complete detailed assessment of impact
that the proposed changes will have. It is noteworthy to denote that abolishing the franking
credit refund may help in reducing the local biasness that is prevalent in Australian market.
This will help in encouraging the diversification of Australian retirement saving pool by
offering incentives to the investors to have high investment in the substitute productive class
assets and international assets (Cormick and McLaren 2017). Nevertheless, the constant
tampering and political interference of superannuation and retirement is structured for long
run and has the ability of increasing the complications and impact the confidence in the
retirement system of Australia.
Conclusively, anybody who is hurt by the new plan still has the probability of
rearranging their tax affairs so that they can reduce their effect. In order to obtain full access
to the franking credits anybody that is adversely impacted by the policy can change the
composition of portfolios in their favour of assets which produces taxable income against the
franking credits that is applicable.

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Answer to question 5:
The new policy that is proposed by the ALP would certain increase the compliance
for the ATO. The stakeholders might bring forward their concerns relating to the use and
collection of data. Concerns have been stated that data on the basis of which the imputation
credits rests might turn out to be inaccurate and ATO might face the difficulty in refining the
data before comparing the relevant information of taxpayers return (Cannavan and Gray
2017). This will contribute towards the problems of compliance and data matching programs
as it involve rightly identifying the cases for the audit and would ultimately expose the
taxpayers in the direction of greater cost of compliance.
Any changes in policy might intensify the complexity of data validity and would
require refining the data before comparing them with the reported information of taxpayers to
identify the probable discrepancies. The cases that will have discrepancies will require
selection process to identify those which is suitable for audit.
Generally the data matching program of ATO is regarded effective in identifying the
instances of omitting the income with large number of projects is yielding high amount of
revenue (McLaren and Cormick 2018). There are several regulatory pyramids that have from
the periodical viewpoint raised appeal. From a reasonable point, the expectation of higher
regulatory sanctions with constant corporate failure provide an incentive to all the players to
economize within the time span so that the differences can be settled soon.
For a tax officer that is performing their duties from rational viewpoint the new policy
would significantly increase the work of compliance. From the functional viewpoint, the new
policy would require greater level of compliance. Furthermore, it is necessary to adopt
dialogue and persuasion where negotiations can be restored whenever necessary. Taxpayers
that shows disagreement a strategy should be adopted that would assist in improving the

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prospects of tax officers to promote compliance. It is worth mentioning that overall
enhancement in communication and improving the indulgence with the taxpayers and tax
agents will help in overcoming the issues of compliance.

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corporations. Accounting & Finance, 58(1), pp.11-55.
Balachandran, B., Henry, D. and Vidanapathirana, B., 2016. Long-Term Price Reaction to
Dividend Reduction in an Imputation Environment–Evidence from Australia.
Balachandran, B., Khan, A., Mather, P. and Theobald, M., 2017. Insider ownership and
dividend policy in an imputation tax environment. Journal of Corporate Finance.
Cannavan, D. and Gray, S., 2017. Dividend drop-off estimates of the value of dividend
imputation tax credits. Pacific-Basin Finance Journal, 46, pp.213-226.
Cormick, R. and McLaren, J., 2017. Dividend imputation: a critical review of the future of
the system.
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Australia. Centre of Policy Studies, Victoria University.
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Australia. Centre for Policy Studies, Victoria University.
Kingston, G., 2015. Dividend imputation or low company tax?. CIFR Paper, (059).

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Mayo, W., 2018, July. Time to upgrade Australia’s company tax system from imputation to
integration. In Australian Tax Forum (Vol. 33, No. 4).
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pp.492-514.
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the system. In Australian Tax Forum (Vol. 33, No. 1, p. 141). Tax Institute.
Melia, A., Docherty, P. and Easton, S., 2016. Net share issues and the cross‐section of equity
returns under a dividend imputation tax system. Accounting & Finance, 56(4), pp.1097-1117.
Murphy, C., 2018. Australia's High Company Tax Rate and Dividend Imputation: A Poor
Recipe for a Small Open Economy?.
Murphy, C., 2018. Modelling Australian corporate tax reforms: updated for the recent US
corporate tax changes.
Murray, J., 2016. Optional distributions under New Zealand's imputation and resident
withholding tax systems. J. Austl. Tax'n, 18, p.103.
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corporate tax rate changes: An Australian study. J. Austl. Tax'n, 18, p.43.
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Trad, B. and Freudenberg, B., 2018. A Dual Income Tax System for Australian Small
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repair. Equity, 32(5), p.6.

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