Ending Cash Refunds for Excess Imputation Credits
What are Imputation Credits?
Hawke and Keating introduced imputation credits in 1987 to avoid tax being paid twice on company profits and dividends. These credits allowed shareholders to reduce their income tax when companies payed them dividends on their shares. If someone didn’t have a tax liability, or if the tax liability was smaller than the imputation credits, the imputation credits went unused. This system did not allow cash refunds to be given to taxpayers once their liabilities had been eliminated.
What is the Problem?
When the budget was in surplus, Howard and Costello changed the rules to allow individuals and superannuation funds to claim cash refunds for any excess imputation credits.
Howard and Costello also made retirement phase superannuation assets tax free. Because a zero rate of tax applies to superannuation income in retirement, increasingly imputation credits are being claimed back as cash refunds.
When it was first introduced, it cost just $550 million a year. Now it’s $6 billion a year, and growing.
Australia is the only country in the world that has this fully refundable dividend imputation system – no other country pays out cash refunds for excess imputation credits.
With an ageing population and a maturing superannuation system, the cost of allowing cash refunds for excess imputation credits will continue to grow. There is growing sentiment that Australia’s current fully refundable dividend imputation system is fiscally unsustainable.
Who is Benefiting from the Current Arrangement?
The vast majority of working Australians do not receive cash refunds for excess imputations credits. Recipients of cash refunds are typically wealthier retirees who aren’t paying income tax. These are people who typically own their own home and also have other tax-free superannuation assets, and don’t pay tax on their superannuation income.
Distributional analysis shows that:
What will Labor do?
Labor will unwind the 2000 Howard Government decision that introduced cash refunds for excess imputation credits for individuals and superannuation funds.
This means that imputation credits for individuals and superannuation funds will no longer be a refundable tax offset, and will return to being a non-refundable tax offset consistent with the tax treatment of most other tax offsets. Cash refunds will not arise if excess imputation credits exceed tax liabilities.
Labor’s policy will only apply to individuals and superannuation funds, and therefore will not apply to bodies such as:
Labor has also announced that we will protect pensioners from the proposed changes to dividend imputation.
Looking After Pensioners
Labor believes in a fair go for Australians – we know a lot of pensioners are struggling with the cost of living and that a small proportion of pensioners rely on modest cash refunds on excess imputation credits.
We’ve always said we’d look after pensioners, and that is why Labor’s Pensioner Guarantee will protect pensioners from our proposed changes to dividend imputation.
The Pensioner Guarantee means Australian government pensioners and allowance recipients will be protected from the abolition of cash refunds for excess dividend imputation credits when the policy commences in July 2019.
Under the Pensioner Guarantee:
These changes mean that every pensioner will be able to benefit from cash refunds. That’s the fair thing to do. There’s no reason for Mr Turnbull to oppose this policy. The policy will commence on 1 July 2019.
Labor will always be better for pensioners
The Liberal Government hasn’t missed an opportunity to come after pensioner benefits.
They continue to support policies to:
The Liberal Government has a long track record of attacking pensioners:
Rebuttal to Government’s Claims
The Government has run a dishonest scare campaign on the impact of this policy –using ‘taxable income’ data to suggest that Labor’s policy was targeting people on very low incomes.
The fact is, taxable income data excludes income from retirement phase superannuation and a lot of the income people receive in retirement is ‘tax free’ because it comes out of retirement phase super funds. As a result, some Australians have low taxable income but actually have high disposable income or are relatively wealthy.
Independent experts have rubbished the government’s claim:
Labor will consult with the Australian Taxation Office, Treasury and tax experts on the implementation of this policy. Labor has already announced it would provide substantial new resources to the ATO to ensure its policies are implemented effectively.
Labor’s policy has been fully costed by the independent Parliamentary Budget Office.
Labor’s policy will improve the budget position by $10.7 billion over the election forward estimates and $55.7 billion over the medium term.
For more information, you can go to https://nb.tai.org.au/close_tax_loopholes.