Threats rise for listed investment

Top marks to the tax experts at Pitcher Partners for alerting investors and business owners to the additional tax penalties facing company shareholders not eligible to claim a cash refund of imputation credits on their dividends. The Pitcher Partner analysis highlights that retirees and other low tax investors will be penalised for investing via listed investment and other company structures.

Investing directly in personal names or via a trust, all income received is taxed only in the hands of the recipient. When a company structure is used to own assets, the situation changes dramatically with all income except franked dividends received from domestic shares subject to the separate company tax levied on all income received by the company.

The company tax covers realised capital gains, personal exertion income, rent, interest income, unfranked dividends and taxable overseas income. All these possible sources of income are subject to company tax before distribution to shareholders as dividends.

The imputation credit system was introduced to ensure company owners are not adversely affected when dividends received are taxed again in the recipients' hands.

This is achieved by allowing full credit including via cash refunds for company tax already paid when the dividends received are subject to tax.

This tax structure ensures that paying company tax does not disadvantage investors including lower income taxpayers, superannuation and pension funds whose marginal income tax rates are lower than the company tax rate. The situation changes dramatically without a cash refund of excess franking credits.

If investors are unable to receive a cash refund when their imputation credits exceed their tax liability, they will be penalised for using a company structure including listed investment companies to own their investments. Not only will they lose part or all their imputation credits from their share investments but they also will face heavier tax bills on all other income received and taxed in the hands of the company managing their investments.

This will encourage direct personal investments and the use of trusts to own assets to avoid being subject to the separate company tax. Trusts have been and will continue to be the principal structure to own managed real estate investments while exchange-traded funds (ETFs) have blossomed as a highly popular way of owning managed share portfolios in recent years.

Without cash refunds of franking credits, the tax system will further increase the popularity of both these investment structures with retirees and other low rate taxpayers.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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