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Dividend imputation. Labor to become the party of personal tax cuts

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Australia gave the world the platypus, the echidna, and a system of taxing company profits so strange that no one - anywhere - has copied it.

Dividend imputation, introduced by Labor treasurer Paul Keating in 1987, is not unusual. Although the methods used vary, many countries attempt to ensure that company profits are taxed only once, either as profits in the hands of the company, or if they are not taxed there, as dividends when they are paid out to shareholders.

In Singapore it’s called the one-tier system. In Australia, Keating gave shareholders in companies who had already paid tax a credit they could use to reduce their own tax by the same amount – until the year 2000, when his successor, Peter Costello, went further. Costello also paid out the credit in cash to shareholders who didn’t pay tax, ensuring that, uniquely in the world, for those shareholders, Australia had a zero-tier company tax system. After the refund, the tax wasn’t collected at either the first or second tier.

Then Costello made things worse. He made all superannuation payouts tax-free for Australians aged 60 and over, as well as all pension income. Retirees on fair to high actual incomes but low or zero taxable incomes became eligible for refund cheques alongside their dividend cheques. And the super funds themselves became low taxpayers. Super funds stop paying tax when they move from accumulating funds while their members are working to paying out funds when their members have retired. As they did so, they increasingly came to rely on refund cheques, which Costello had ensured they were entitled to along with dividend cheques.

The leakage of company tax was growing so fast that the tax discussion paper commissioned by treasurer Joe Hockey referred to “revenue concerns” about refund cheques, concerns the Treasury has continued to pursue under his successor, Scott Morrison.

There’s more in it for Labor than plugging leakage, just as there would have been for Morrison. Along with its planned crackdown on negative gearing and its decision not to fully embrace the Coalition’s proposed company tax cuts, it will amass a larger stock of money than the Coalition will to pay for big personal income tax cuts. The maths are unarguable.

Peter Martin is economics editor of The Age.

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