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John Quiggin 
There’s an argument that refunding franking credits to shareholders is a ‘principle’. It isn’t.
The Robert Carling position runs like this. Refundable franking credits work like prepayments of personal income tax; prepayments should be refundable in full; therefore franking credits should be fully refundable as a matter of principle.
Set out simply, the fallacies are plain. Franking credits don’t arise from any prepayment by the shareholder of their personal income tax. They are only like prepayments of shareholder personal tax if the credits are fully refundable. But that’s the very conclusion the ‘principle’ seeks to prove.
And whether prepayments should be refundable in full, or might carry forward (only) in some cases, or might be lost, is itself debatable.
For Carling and the propertarian propaganda unit he represents, ‘property’ is sacred and anything they want to support turns into, or should be turned into, ‘property’.
But shareholders turned their business investment into property: shares. And so the company earns its own income, on which it has its own tax liability. And the company derives its own profits (realised and unrealised, taxed and untaxed) from which it may choose to pay dividends. It’s those dividends that are shareholder income.
Take your tax liability down to zero, and lots of other tax credits or deductions are lost. You can’t say that franking credit refunds are a ‘principle’.
Very, very, very confused chrishod
“Franking credits don’t arise from any prepayment by the shareholder of their personal income tax. They are only like prepayments of shareholder personal tax if the credits are fully refundable. But that’s the very conclusion the ‘principle’ seeks to prove”.
The part of profits that is paid to shareholders as dividends is taxed at the shareholder’s marginal tax rate. Of that the company extracts 30% (if it pays full company tax) as a prepayment to the government. Then the shareholder pays the rest i.e. their MRT minus the amount prepaid.
Now what is so difficult about that to understand? When you fill in your tax return you record the full dividend received as income and having done that subtract an imputation credit equal to the amount that was actually prepaid by the firm. It isn’t an illusion – it was actually paid – it was sent by the firm to the ATO.
Of course if you are not eligible to have the tax deducted by the firm the tax that was wrongly deducted as a pre-payment should be returned by the ATO since you were not eligible to pay it. That is what Carling is saying. If you don’t agree with this you must be rejecting the idea of a minimum threshold income ($18,200) below which income tax is not paid.
What in the name of goodness is hard to understand about that? Moreover, that has been the philosophy behind corporate taxes for years. On retained earnings you pay company tax. Income to shareholders is taxed as income to shareholders. Company tax is a withholding tax” . On retained earnngs the company tax covers the effects of deferring taxation liability to shareholders – eventually they will benefit from capital gains and higher future dividends – but hit them now. Income to shareholders paid now – prepay 30% and leave the shareholder the obligation to top up the unpaid part of their tax liability.
When I read your claims I can see that you don’t understand the idea of a corporate tax or of the idea of avoiding double taxation. All income generated by a firm as profits belongs to shareholders – now or in the future. It is appropriate therefore for the company tax rate to capture taxes at a rate corresponding to the taxation liability of those shareholders. There is no one else hidden in the background.
Company tax is a withholding tax
This is not actually true. Company tax is in effect a withholding tax under the imputation system, for domestic residents. But it was not the intent of the imputation system. It’s just the way it worked out. (Foreign residents who receive dividends from Australian companies have never received imputation credits that they can use to reduce the personal tax they owe the Australian government.) The intent of the original imputation system was to eliminate the double taxation of profits. That intent is preserved under the Labor Party policy since low income earners will not be taxed on their dividends, which are paid out of after-company-tax profits.
(There is a point of nuance in that companies are taxed on their taxable income, which is not the same as profits, while dividends are paid out of profits minus company tax, but that need not detain us here.)
Smith9
I nearly get it.
“Company tax is a withholding tax. This is not actually true. Company tax is in effect a withholding tax under the imputation system, for domestic residents. But it was not the intent of the imputation system.”
It is. It isn’t. It is, in effect. But it was never the intention even if it is. Yep.
Levying company tax on foreigners is an ad hoc attempt by the ATO to grab a slab of foreign dividend income. Bitterly opposed by foreigners because they don’t get the imputation benefit.
This taxed foreign income is the main adverse effect for the ATO of cutting corporate taxes since the cut has nearly no effect on ATO revenues from taxing resident dividends – firms pay less withholding tax and so shareholders must pay more directly themselves. Of course the reduced rate does have an impact on taxed retained earnings which might allow firms to better defer taxes for residents further into the future.
But generally the foreign income issue here has nothing to do with the validity of franking credits for low earned income residents.
Levying company tax on foreigners is an ad hoc attempt by the ATO to grab a slab of foreign dividend income. Bitterly opposed by foreigners because they don’t get the imputation benefit.
The ATO doesn’t make tax policy or tax law. It implements the policy and the law. No doubt foreigners would like imputation benefits. When their governments give Australian investors the breaks that they get, I am sure we’d be happy to return the favour. In the meantime, it’s no deal.
You didn’t answer my point about about company tax not intended to be a withholding tax. Go back and read the debates at the time. You can even read the second reading speech in the parliament. Nobody said anything about withholding taxes. All anybody ever talked about was abolition of double taxation.
Poor harryclarke. He is, indeed, very very confused.
Franking credits don’t arise from a withholding tax. They arise from tax on a company’s own income. That tax is paid on the company’s income, not prepaid on the company’s dividends…if any, and when they arise.
Dividends don’t arise only, or necessarily, from taxed income. They arise from company profits – realised or unrealised, taxed or untaxed, capital or revenue.
Franking credits don’t arise from dividends. They are attached to dividends (maybe at less than 100% franking rate; maybe not at all; subject to rules to limit streaming franking credits to those shareholders for whom the credits would be more valuable).
So harryclarke has to traduce Smith9’s point. Yes, Smith9 is right.
And harryclarke has to ignore my point that the tax system is full of deductions, credits and rebates that are lost, and others that are deferred, once this year’s tax liability is satisfied.
Obfuscation of plain points is not a principle – it’s just a technique, used again and again by harryclarke.
Calling franking credit for a company’s tax a prepayment of tax by the shareholder is just an attempt to assume away the issues, rather than to argue them.
chrishod – “There’s an argument that refunding franking credits to shareholders is a ‘principle’. It isn’t.”
It is an unprincipled argument.
Further to Chrishod’s point that franking credits have all sorts of rules attached, according to the ATO
Unfrankable distributions include:
distributions made in respect of shares treated as debt interest under the debt test (non-equity shares)
distributions made in relation to an instrument characterised as an equity interest under the equity test (non-share equity) where the distribution exceeds available frankable profits
distributions made by approved deposit institutions in respect of certain capital instruments issued overseas that are characterised as non-share equity under the equity test
distributions that are treated as demerger dividends for taxation purposes
distributions sourced from a company’s share capital account
excessive payments by private companies to shareholders, directors and associates that are deemed to be dividends
payments or loans made by private companies to their members (or their associates) deemed as dividends under Division 7A (except in some circumstances – see Private company benefits – Division 7A dividends)
distributions to controlled foreign companies that are deemed to be dividends under section 47A of the Income Tax Assessment Act 1936
distributions relating to off-market buy-backs of shares where the amount paid for the buy-back exceeds the market value of the share (ignoring the buy-back)
payments to CGT concession stakeholders of exempt amounts (where the small business 15-year exemption is available)
payments to CGT concession stakeholders of exempt amounts (where the small business retirement exemption is available)
deemed dividends relating to the streaming of bonus shares to some members and minimally franked (franked to less than 10%) dividends to other members
deemed dividends relating to capital streaming and dividend substitution arrangements
certain payments made by NZ franking companies
distributions from profits sourced in Norfolk Island before 1 July 2016 from companies resident there
Tax law is complicated. If you must criticise the Labor Party’s policy it is that it will make it a bit more complicated.
Crock. :may have been” … “formed the view”. And imo ‘we aren’t really trying – 20yrs ago, politics and they have certificates to basically let them off’.
I’ve been a techo. Somewhere there is a cloud, drive, usb or unindexed undeleted file with those texts.
“Australian federal police officials also told a Senate estimates committee on Monday morning they formed the view while investigating the leaks that evidence “may have been destroyed”.
https://www.theguardian.com/australia-news/2019/feb/18/awu-raid-leak-evidence-may-have-been-destroyed-federal-police-say
hc – “But generally the foreign income issue here has nothing to do with the validity of franking credits for low earned income residents.”
Do you mean income from actual time spent in gainful employment? Another topic, other tax dodges. I’ll assume you mean personal income from any/all sources. To use your wording, there’s low (earned) income residents, and there’s low (earned) taxable income residents. These should not be indiscriminately and unconditionally conflated as you and old CIS mate Carling do. For example, there are young battlers knocking themselves out having to work multiple low pay part-time jobs that meet both conditions of earning a low income, and a low/nil taxable income. There are currently retirees and others ‘earning’ nil taxable income whilst ‘earning’ amounts comparatively astronomically far from a low income,
To JQ. “The lagging tale leads to less book sale.” Kt2zhou!
Time for an update: “… His latest book, Zombie Economics: How Dead Ideas Still Walk Among Us, was released in 2010 by Princeton University Press, and has been translated into eight languages.”
http://esacentral.org.au/national-economic-panel-item/17340/john-quiggin/?type_fr=369
hc,
a company may decide to pay shareholders a certain dividend paid from a certain portion of after tax profit. Note: that is company tax. In the hands of the shareholder the dividend received is shareholder income not profit.
“Of that the company extracts 30% (if it pays full company tax) as a prepayment to the government.”
– No, company tax is just that, COMPANY TAX, it isn’t any sort of prepayment it is a payment made after company tax liabilitiy assessment, it is not a pre or post payment of any other kind of tax. The company has no idea, is not required to know, the shareholder’s income tax situation in any given year.
“…the amount that was actually prepaid by the firm. It isn’t an illusion…”
– It is not extra income that is imputed, it is an imputed tax credit that may be offset against the shareholder’s total tax liabilities. Any other view like Carling’s is not an illusion, rather it is a delusion.
“If you don’t agree with this you must be rejecting the idea of a minimum threshold income ($18,200) below which income tax is not paid.”
– No, what Carling and you are really saying is that you both want to see continuing zero distinctions between income and taxable income for a select, aged, quite affluent, and rather tiny cohort of Australian residents. You want at the very least this aspect of trickle-up economics maintained as implemented by Brandis’ so called lying rodent in the dying days of its rule.
“What in the name of goodness is hard to understand about that? Moreover, that has been the philosophy behind corporate taxes for years. On retained earnings you pay company tax. Income to shareholders is taxed as income to shareholders. Company tax is a withholding tax”.”
– No, companies aren’t the ATO. Companies don’t tax shareholders. Companies are not authorised to withold tax from dividend payments made to shareholders. The ATO may impute to a resident shareholder a tax credit from a dividend distribution where company tax has been paid on the funds distributed. The ATO, never the company.
“All income generated by a firm as profits belongs to shareholders – now or in the future. .. There is no one else hidden in the background.”
– No, they are two seperate legal entities. The shareholder gets, if anything, what part the company decides to give. In the event the company is wound up the shareholder stands in line after others first receive their due. In fact there are nearly always many “hidden in the background”.
Proposed ALP changes to refundable franking credits…
Some principled arguments, pro and con, in the Grattan submission by Danielle Wood and Brendan Coates to the Wilsons’ travelling circus of an inquiry into the implications of removing refundable franking credits:
https://grattan.edu.au/wp-content/uploads/2018/11/The-implications-of-removing-refundable-franking-credits-Grattan-submission-.pdf [19pp, 418KB]
That link from:
https :// grattan.edu.au/news/the-implications-of-removing-refundable-franking-credits/
And that linked from an Inside Story update earlier this month of Grattan/Guardian articles in March last year:
https :// insidestory.org.au/the-real-story-of-labors-dividend-imputation-reforms/
Please comment on how to get the visuals. I’d work for free on it.
Smith9, I and I believe many others would like all tax law and in particular “Unfrankable distributions ” able to be read like my watch:
! Wow !
“Potential Where, When, What, Which, How, Who and Why-Questions
to be asked about Peace Problems, Strategies and Values (emergent groups and details)
(represents 3437 Problem-Questions with 4979 links; 3665 Strategies-Questions with 11312 links;”
Developer…
“John’s scientific theories have been applied to criminology to help detect and prevent or pre-empt crime. Among other prominent cases, he has worked on the backpacker murders in the 1990s and on the Bali bombings.
John is the founder of NetMap Analytics… ”
https://www.churchie.com.au/community/old-boys-association/australia-day-honours
Electric transport milestone: sales of internal combustion light vehicles (ICEVs) fell in 2018 in the three major markets (USA, Europe and China), with more than all the total growth taken up by electrics. This confirms expert prognoses I already noted here. (******cleantechnica.com/2019/02/16/fossil-vehicle-sales-are-officially-now-decreasing-in-china-europe-us/)
It may be theoretically possible for the trend in the big three to be outweighed by the rest of the world (India, Brazil, Turkey, Iran, Mexico, Australia ..) but it’s not very likely. We should have confirmation later in the year.
2% or whatever down, 98% to go. Optimists should celebrate. It is very hard to see what could bring this revolution to a halt. We have been seeing explosive growth in demand for a product that is still expensive in sticker terms, with a range typically much less than a full day’s driving, reliant therefore on patchy recharging infrastructure for long trips, and, outside China, only available in a limited range of models. All these problems are steadily shrinking. The quite large tax breaks in the key market countries for early adopters seem politically solid, even in Trump’s USA, and should last until EVs can stand on their own. This change is happening as fast as anybody could reasonably hope for.
The economics of taxation has little to do with law and much to do with equity and fairness. Economists argue that tax law should be simple enough to understand easily. This is not the case in Australia. We seem to have an Irish logic tax system. The Irish tax office can send out a judgement that says simply:
“It is our determination that the tax dodger mentioned is NOT guilty of breaking our tax laws.”
The paradox is explained away,of course, in the wording of that tax law.
But economics pushes back with equity concerns. This is how all tax should be judged. The incidence of tax may vary from the final impact of that tax. Take for example the GST and all value added taxes; The incidence of all such taxes is on the seller BUT the final impact is felt by the buyer.
Equity is hard to undersatnd. It involves two basic principles. Furstly, the Principle of Vertical Equity states that those with higher incomes should pay more tax, Secondly, the Principle of Horizontal equity states that any tax system should not give preferential treatment to certain individuals and/or companies.
These two principles ,along with a simple test for fairness, gives an economic judgement on any specific tax. Economists should NOt consider the legal problems of implementation. This is not for economists to judge. The lawyers are there for that purpose.
As for political considerations, only political economists would consider such matters. These are now being mentioned in the current fake election campaign. Judgement there must be left to the voters on elecion day.
I loathe rule changes and never during the game, so I can see both sides here. But grandfather can’t live forever. Second class is a state of mind.
Franking credits. In their own words:
Value / happy proposition: [“Therese and I have a little less than $1.2 million in our self-managed super fund,” ]
“”Now, who needs assistance? Me with 50 years of the aged pension, somebody with 100 years of the aged pension or someone who’s struggling on the aged pension?”
As opposed to price / not happy proposition:
[ Also self-funded retirees, they pay no tax on an income of about $75,000 a year, including about $20,000 from the refund on franking credits. This is in part because income from a superannuation fund is not taxed at all.]
“”I do think it’s unfair, we’ve been told to do things a certain way and we’ve done it and this is what happens,” Ms Taylor said.
“My point is that I’m now a second-class retiree with shares.”
“This retiree is happy to see the end of cash refunds on franking credits”
https://abc.net.au/news/2019-02-18/these-wealthy-retirees-are-happy-to-see-the-end-of-franking/10815854
Is the union formerly known as the CFMEU now the CFMMEU (I know they merged with the maritime union) or is still the CFMEU?
I read stories in the media that refer to one and other stories that refer to the other. In today’s Guardian there is a story that refers to both, interchangeably. (Do sub-editors still exist?)
You didn’t answer my point about about company tax not intended to be a withholding tax.
I don’t know about anyone else, but the reason I haven’t responded is because I don’t care, because I don’t think the history or the original intent are worth a candle compared to the here-and-now policy implications.
If the history or the original intent are not worth a candle to the here-and-now policy implications, what are those?
The arguments for refunding excess franking credits to shareholders have here-and-now policy implications, from the increase in non-pension tax support (now exceeding pensions, and not significantly reducing pensions) to general revenue issues. Which are the policy implications that make conflating company tax with a withholding tax on shareholders irrelevant?
And will this silence hc, harryclarke or Robert Carling?
And will this silence hc, harryclarke or Robert Carling?
While it is not impossible that hc is Hillary Clinton, hc and harryclarke are probably the same person.
On whether company tax is a withholding tax, when the company tax rate for small companies was reduced recently to 27.5%, franking credits for all (eligible) dividends were credited at the rate of 27.5%, including dividends paid on profits made in earlier years which had been taxed at 30%. If company tax was really just a withholding tax then the franking credits attached to the dividends from the old profits would have been credited at 30%.
The government has thrown Bill Shorten a lifetime over the medevacs and he is grabbing it with three hands.
On the news that the government will medically transfer them to Christmas Island not the mainland (adjacent to Indonesia, but still part of Australia; Phelps’ bill didn’t say anything about them getting an Opera House view), Shorten says
“If the medical treatment is delivered and delivered on Christmas Island and it makes people well, that’s fine.”
Could neutralise the issue nicely. The Greens are apoplectic, of course.
Well-played the public servant who thought up that little trick.
Agree with Collins Street – I couldn’t give a hang about the “intent” of policy – whatever that means – I am interested in what the policy is and how it functions.
The argument that taxes on the gross income paid as dividends to shareholders are a withholding tax is so simple that it seems almost impossible to not understand. Firms prepay tax at (generally) 30% (or whatever) on dividends – a withholding tax for shareholders – and shareholders pay tax equal to the (dividend rate- withholding tax)+ imputation credit. The term in brackets is what the firm pays the shareholders. The last two items cancel out so shareholders, yes, are taxed at their marginal tax rate – part of that covered by the company tax firms pay on these dividends and the residual coughed-up by the shareholders themselves.
I have said this now many times and if you don’t get it you don’t.
?
Dividends are derived from after tax profits.
A withholding tax is held back at source
Companies don’t withhold tax on behalf of the shareholder, it is the ATO that refunds tax to the shareholder.
.
@Smith9
At some point you will have to concede that the numerous govt stuff ups are theirs entirely.
hc – “part of that covered by the company tax firms pay on these dividends”
Companies are not taxed/levied on the amounts of their dividend distributions. Companies are taxed on their profits.
“I have said this now many times and if you don’t get it you don’t.”
You assume a misunderstanding of what you, and Carling et al, are saying. You are wrong again.
hc – “I have said this now many times and if you don’t get it you don’t.”
Read Caitlin Fitzsimmons’ entire article at the link.
https://www.smh.com.au/money/tax/real-victims-of-labor-s-dividend-tax-policy-are-not-average-joannes-20181122-p50ho7.html
Real ‘victims’ of Labor’s dividend tax policy are not average Joannes
by Caitlin Fitzsimmons, SMH, November 24, 2018
tldr? Well, then just skip straight to the bottom line.
“…Wilson complained this week that Labor’s policy would drive people to invest offshore and also to seek stocks with lower dividends or lesser tax burdens such as property trusts, but he didn’t make the case for why this a bad thing.
Investment experts have been telling us for years that most Australian investors are over-exposed to local equities. If someone is basing their investment decisions on a tax break then surely that’s the very definition of a market distortion.
Tax policy never stands still and for beneficiaries of the current regime this was always too good to last. Labor’s change is not a retrospective tax, as some have claimed, because it doesn’t seek to claw back franking credit refunds made over the past 18 years, and since shares are liquid, investors are free to change tack for future years.
Correcting this absurd situation will be inconvenient, disruptive and perhaps even painful for some individuals. Nonetheless, it’s the right thing to do.
When you strip away the misinformation, the opposition to Labor’s plan can be best summed up as “tax is theft”. That might be so, but it’s also the price of civilisation.
It’s not sustainable to have situation where most people over the age of 65 pay no tax, especially if they’re objectively wealthy, nor one where the government doesn’t get its share of corporate profits simply because a company chooses to pay it all out in the form of dividends to retirees who can claim a lower rate.
Labor has been praised for developing policies and taking them to an election, rather than running a small-target strategy. The flipside to that is that it has provided a target and its opponents are practising their archery.
So far any objective analysis would have to conclude that the arguments are missing their mark.”
Companies are not taxed/levied on the amounts of their dividend distributions. Companies are taxed on their profits.
And the substantive effect of this distinction?
None. Not an electronic sausage; it all cancels out at the backend.
I’m… you seem to be going out of your way to make communication needlessly difficult. The slightest discrepancy between the language used and the language you’ve deemed ideal leads you to act all confused.
I mean, there’s a word for what you’re doing and the word is “petulance”.
harrryclarke has now said many times that ‘Firms prepay tax at (generally) 30% (or whatever) on dividends – a withholding tax for shareholders – and shareholders pay tax equal to the (dividend rate- withholding tax)+ imputation credit.’
I and others have pointed out many times that his claim is false. His repetitions do not add verisimilitude. His failure to deal with the points others make reduces his credibility.
I have pointed out that his actual proposition, stated by some others too, is no more than that with full refundability the tax effect of franking credits is much the same as if there were a withholding tax on (grossed up) dividends of the amount the company decides to offer as franking credits. As an argument that therefore refundability must continue so as to maintain withholding tax treatment, this assumes the very thing challenged by ending refunds of excess franking credits.
He now claims not to care about the intent of franking credit refundability: just the way it functions.
But the current refunds are a function that can be changed. If policy intent doesn’t matter, then harryclarke eschews policy arguments. On that basis one can neither argue to continue current refunds nor to end them.
This is not what he is doing. He is ignoring the fact that there is no withholding tax on dividends (grossed up for the tax); there is only a tax on company income. He is ignoring the fact that dividends are not paid out of company income, but out of profits, and need not be paid in full or at all. He is ignoring the fact that profits may be realised or unrealised, capital or income, taxed or untaxed. He is ignoring the fact that franking credits are a statutory construct, and allowing them to shareholders is based neither on a payment by them nor on a payment actually on their behalf.
I get what he is saying, and I think others do too.
He doesn’t admit the difference between how franking credits actually work and the withholding tax on grossed up dividends to which, if refundable, they are very nearly economically equivalent. He wants to hang onto an argument that assumes the answer he wants.
I think it is more than petulance. It is an inability/unwillingness to think clearly about a simple tax issue. Trying to cover basic misunderstandings with a smokescreen.
Collin Street says that pointing out that companies do not, in fact, withhold tax on grossed up dividends is ‘petulance’. Claiming that because, with refundability, franking credits have much the same effect as a withholding tax on grossed up dividends is not ‘petulance’. Claiming that because, presently, the equivalence exists withholding tax treatment is principled is not ‘petulance’ either. Unprincipled, certainly; baseless, certainly; question-begging, certainly; propertarian propaganda, certainly.
.He is ignoring the fact
If a given fact doesn’t matter, then you’re actually allowed — encouraged — to ignore it!
[the claim “X is ignoring Y” contains an implicit “Y matters”, that Y’s truth has consequences of relevance to the situation at hand. Well, normally: what’s happening here is that you’re pointing to all these things getting ignored, but there’s severe doubt as to whether say your description of company tax as “definitely not a withholding tax” has any real-world consequences. And people have told you this and you’re reacting kinda badly.]
[I’m also going to point out that you seem to have a problem properly understanding people who are disagreeing with you; you’re.. “no that’s not true” is a negation of your statement, but I think you have a tendency to draw the scope of the negation too widely, to think that people are disagreeing with you more than they actually are. Which leads to strawmanning and &c].
Me
It is, of course, harryclarke who asserted that the franking system actually being a withholding tax made refundability a matter of principle. Whether the franking system is a withholding tax on shareholder dividends really matters to this assertion. And it matters that the assertion is plainly wrong.
It can hardly be irrelevant to his arguments that company income tax is not a withholding tax for shareholders in fact. For then harryclarke’s ‘principled’ argument is baseless.
Rather than deal with this problem, he and Collin Street now say that whether company tax is in fact a withholding tax for shareholders is unimportant.
If this is unimportant, then I have been right to identify the claim that current refundable franking credit arrangements have much the same tax effect as a withholding tax on shareholder dividends as the basis of the ‘principled’ argument.
Now, how is the harryclarke and the Collin Street position anything more than a sleight of hand, justifying refunding franking credits by claiming that doing so would be required if there were really a withholding tax on grossed up dividends to shareholders…and it doesn’t matter that there is no such withholding tax?
“None. Not an electronic sausage; it all cancels out at the backend.”
No, like many a sausage all you have there is another case of garbage in, garbage out. There’s a good website for sausage making… I’ll be sure to send you the link.
Janet Albrechtsen gets it 100% correct in The Oz today:
“Contrary to Bowen’s misleading claims, cash rebates paid to shareholders for franking credits are not welfare payments from a generous government. They are not taxpayer-funded cash handouts. They are a return of tax paid by companies on behalf of resident shareholders.
When a company pays tax on its profits, it effectively pays withholding tax at the company tax rate of 30 per cent upfront to the Australian Taxation Office on behalf of its resident owners, Australian shareholders. If a shareholder has a marginal tax rate below 30 per cent, they are entitled to a refund from the tax office.
Forget the technical lingo in this area. When the tax office makes a cash payment to a shareholder in these circumstances, it is a refund for tax already paid upfront. Nothing more, nothing less”.
Of course this is the “pro-neoliberal capitalistic media” speaking (or other such attacking -the-messenger slogans of abuse). But she is correct as I am (and as so too is Carling).
https://www.theaustralian.com.au/opinion/loved-by-good-not-labors-wayward-robin-hood/news-story/753ae18c45752c93401d6a546e8fb791
“If a shareholder has a marginal tax rate below 30 per cent, they are entitled to a refund from the tax office.”
This is only true if the tax law says they are so entitled. If a government changes the law, as Labor is proposing, they lose that entitlement.
Tax laws change all the time and when they do so do “entitlements”. People used to be entitled to make capital gains tax-fee and they used to be entitled to receive fringe benefits tax-free. That changed in the 1980s. Entitlements to claim certain expenses as tax deductions come and go. People used to be entitled to buy services free of sales tax. That entitlement was lost with the introduction of the GST. First home buyers in some states have recently become entitled to pay lower rates of stamp duty. And so on.
Entitlements under tax law are not God given and they are not immutable.
You can argue whether Labor’s policy is good or bad, as with any policy, But we’re talking about Thomas Paine’s Rights of Man here.
Svante says: FEBRUARY 19, 2019 AT 8:57 PM
… but hc … harry? Wont accept new information due to potentially extreme cognitive dissonance and his moral and ethical bypass on the issue.
Here is a picture to assist harry.
Hc. How can you possibly write this without being accused of being a troll – or worse, having a god delusion:
“Janet Albrechtsen gets it 100% correct “.
Janet is a human, and she like you doesn’t like contrary views even if painstakingly pointed out (thanks svante) Janet is on her own planet and admits to deliberately Miss quoting to the use that Miss Quote to:
“In 2002, Marr stated on Media Watch that conservative newspaper columnist Janet Albrechtsen had misquoted a French psychiatrist, Jean-Jacques Rassial, and claimed that she had done this deliberately to make it look as though violence and gang rape were institutionalised elements of the culture of Muslim youths.[5] Albrechtsen did not deny the misquote, but responded by accusing Media Watch of inherent left-wing bias and of deliberately leading a witch-hunt against contrary views. https://en.wikipedia.org/wiki/David_Marr_(journalist)
Janet Albrechtsen DOESN’T get it 100% correct and has quoted many a denier. Do you also agree with judith curry harry?
Watch your foot…
Ernistine. Thanks again, and to Gregory for prompt.
I’m glad you only hinted at the possibility of the clues in your answer Ernestine, to draw the student forward with their own cognition – to think for themselves. And ” lumpy things” is my new favorite term.
I am now bursting with questions which won’t be answered without a great deal of study on my part. That is why I took immediately to stock and flow sytem dynamics models. Your knowledge was laid bare, I was able to isolate and test the individual equations (except log^10! everyone in the office had to have a think on that), do a little “breakout box” , simplify an equation, generate a dashboard and drive the system, delivering csv files to plug back into a boring old spreadsheet. I would say, the models gave me a 10pt IQ bump and swallowed 2yrs at uni in a single bound.
I would say I now need a 10pt iq bump to have your understanding.
You can argue whether Labor’s policy is good or bad, as with any policy
Sure. But… you’re not, are you? Lots of stuff about how “originally it wasn’t supposed to work that way” and “you’re saying it works like this, but actually it works in a significantly-different theoretical framework that gives near-identical results”, but not a lot of “I think that this change will improve the distribution of the tax burden” or what-have-you.
It seems like everyone on this thread is now arguing with everyone else, regardless of their actual opinion on Labor’s dividend imputation policy. It must be the political zeitgeist. I blame Scott Morrison! 😀
So, I have a job and I have some shares. On my tax return it says “Franking credits $7,199.” What happens to me? Would I have to suddenly have to pay an extra $7,199 a year in tax? To me that’s a big jump over what I am currently paying.
The policy to trump all policies is the one that says that you don’t pay tax twice.
Retirees can pay tax through their shares without breaching this policy. As this will be the only instance of them having tax paid they don’t qualify for a refund.
Harry is confusing total income with taxable income. not for the last time.
People are getting superannuation benefits are not taxed. Under Harry’s example at his blog they can have share portfolio of some $360k and still not pay tax indeed they get a negative income tax and he claims this is regressive!
Collin Street returns to say that others aren’t arguing the merits of ending full refundability of franking credits.
As with his previous comments, he’s neglecting that it’s hc, harryclarke, Carling and Albrechtsen who are ignoring merit arguments. They are each arguing that there’s some point of fundamental principle based on franking credits being a withholding tax, and therefore representing tax paid by the shareholder from the shareholder’s income. (It isn’t.) Tax paid should (they argue) be fully credited, and any excess refunded, to the payer. So there’s no need to discuss the merits – there’s a fundamental principle about withholding that trumps any discussion of merits of refunding excess credits.
It’s that unsound argument, based on falsehoods, that has been comprehensively exploded.
That leaves the merits arguments all standing. They have been widely put; and they are all against refunding excess franking credits, for various reasons. If Collin Street wants to discuss any or all of them, he can. And others might then respond to his views, as they did to the false ‘fundamental principle’ argument.
I’m for going back to non-refund of excess franking credits, the original design of the franking system.
I’m sorry Bob has been completely bamboozled. Of course, if you have a job and shares and have franking credits, ending refundability of excess credits doesn’t deprive you of the use of those credits against what tax liability you do have. So Bob’s question has nothing to do with Labor’s policy or with any of this discussion. I don’t know who has suggested that Bob loses franking credits altogether and can no longer use them for any purpose.
So there’s no need to discuss the merits – there’s a fundamental principle about withholding that trumps any discussion of merits of refunding excess credits.
Perhaps now might be a good time to offer some thoughts on why refunding excess credits is a bad idea. Maybe doing something along those lines might change the direction of the conversation away from axiomatic assertion and towards considered discussion on the merits and demerits of the policy.
Be the change you want to see, and all that.
Wait a minute, “Excess franking credits?” So if my franking credits are $7,199 and I pay $20,000 in tax then since my tax bill is higher than my franking credits there is no change in the amount of tax I have to pay? Well that’s okay then. I’m all in favor of higher taxes as long as I am not actually paying them.
It gets worse Bob,
In Harry’s example on his good blog he has a retiree getting $18k in dividends which means roughly a share portfolio of $260k.
If we assume that person is only getting $70k annually in their superannuation pension ( a highly conservative assumption for a whole bunch of reasons) then Harry’s retiree is getting $88k annually and not paying any tax at all. Indeed at present they would add the negative income tax they get from the franking credits,
This present policy is highly regressive.
The discussion on this issue seems to proceed on the assumption that the only people who get cash back on excess franking credits are retirees. This is not true. Anybody who has a self managed super fund with Australian equities in it gets cash back.
So consider Mr Wealthy who has $5 million in equities in his SMSF. (There are plenty of such people. I even know some of them. And contrary to myth, there is no upper limit to how much anyone can have in super in the accumulation phase. The limits are only in the pension phase.) His super fund will be getting say $280,000 per year in dividends. If fully franked, these dividends will have $120,000 of franking credits attached.
Super funds in the accumulation phase pay tax at a rate of 15% and so Mr Wealthy’s SMSF pays 0.15*($280000+$120000)-$120000 = -$60,000 in tax. Yes, it pays negative tax. It gets a cash refund of $60,000.
Under the Labor policy Mr Wealthy’s SMSF won’t have to send any money to the ATO on its income, but it won’t get the cash back either.