Labor's Position on Key Issues

Dividend Imputations: Explained

February 26, 2019

Here is my best attempt to explain proposed changes to dividend imputation cash rebates.  First of all a reminder, anyone who receives a pension or part-pension will not be affected.

Jack works as a lawyer.  He owns BHP shares and receives an annual dividend of $7,000 from BHP.  Jack’s marginal tax rate is 37 per cent and once upon a time he would have paid $2,590 in tax on his $7,000.  But Paul Keating decided to change that.  He did so because BHP had already paid tax on the earnings ($3,000) it used to generate Jack’s dividend.  So thanks to Keating, when Jack does his tax return now he still pays tax on the $7,000 dividend but only pays the difference between his 37 per cent tax rate and the corporate rate of 30 percent (he’ll pay much less than $1,000 instead of $2,590).  That means the Government doesn’t collect the tax twice.  Fair.

Bill is a retired engineer.  He and his wife Pam have non-home assets (including the total value of his industry superannuation) valued at $900,000.  That’s enough to deny them a part pension from the Government.  Bill and Pam pay no tax on their regular super payments because Bill is more than 60 years old.

Bill and Pam’s assets include BHP shares. They receive an annual dividend from BHP of $7,000 just like Jack. Bill pays no tax on the dividend because he is not in the tax system.  Unlike Jack, under Paul Keating’s laws Bill would not have received a tax rebate to reduce his BHP earnings tax liability by the amount BHP paid in tax because he pays no tax.  In this example, the tax is only paid once.  Fair.  But many years ago John Howard decided that Bill should receive a tax rebate even though he doesn’t pay tax.  So Bill receives his $7,000 dividend from BHP tax-free plus a $3,000 (the amount of tax BHP paid) cheque from the taxpayer for no reason. It’s a very strange arrangement not found anywhere else in the world.

But 61 year old Peter and his wife Joan have $3 million worth of BHP shares in a self–managed super fund. Each year the fund receives dividends from BHP of around $128,000.  Under Australian law at 61, neither Peter nor his super fund pays tax.  Under Paul Keating’s laws he received no rebate from the tax BHP paid to off-set his tax obligation because he pays no tax. But under John Howard’s changes, he receives a cheque from the taxpayer totalling $54,600 each year (the amount BHP paid in tax).  Why?  There is no rational reason other than votes.

When John Howard introduced this change it was costing the Commonwealth Budget around $500 million each year.   It’s now costing $5 billion each year and most of the benefit is going to relatively wealthy people who don’t pay tax.

Think about that for a moment: if all of BHP’s shares were held by people like Peter and Bill, the Government would receive no tax revenue from BHP because it would all go back to Bill, Peter and those like them. Not fair on the taxpayer.

The following articles are also good tools to understand this policy: