Maintain Dividend Imputation

Dividend imputation is efficient

The recent Murray report called into question the appropriateness of dividend imputation. This system was implemented in the early 1990s in reflection of the previous in effect double taxation of company profits to ultimate shareholders. The dividend imputation system in essence merely creates a pass through environment and an efficiency for capital markets upon which our economy is built. Removal of dividend imputation would have significant negative impact on capital markets affecting the superannuation reserves of our wide and ageing population.

Prior to dividend imputation companies paid tax on their profits and then paid dividends to shareholders who then paid tax again without credit for the taxes the company had paid.

There is no doubt the call from the Murray report was driven by a perception that dividend imputation unnecessarily rewarded lower tax paying shareholders most particularly SMSF and most substantially those retirees in pension phase. In essence it implies that dividend imputation favours those with wealth or in retirement phase and that in turn it is causing a disproportionate investment in risk assets as opposed to bank and other equivalent deposits.

Undoubtedly dividend imputation has aided peoples decision process in selecting their investments, and this is most particularly so in a low interest rate environment, and was likely substantially less so when we had a high interest rate environment.

Personally I believe a call to remove or limit dividend imputation is a return to double tax, is inefficient and would have substantial negative impacts on our capital markets as returns would change, retirement income streams would change and capital values surely suffer.

Companies can access debt at a low interest rate as can shareholders, companies can choose to raise capital by debt or equity instruments and are constantly making capital management decisions.

Some may say this is only an issue for retirees, fund managers and big business. That view is naive.

Any such change will impact small business in Australia substantially as it will change their ultimate reward (for the worse) and drive such consequential review of structures, creating more cost and distraction, when we are all better focussed on strategy and making businesses succeed.

There is no doubt the taxation system needs a complete review, one which is holistic, strategic and bipartisan with all elements in the mix.

But, I say, hands off dividend imputation, particularly when this country needs efficient capital markets, companies with certainty in equity markets so as to retain and raise capital, and retirees not punished on retirement income flows or capital value.

Craig Farrow
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