Credit loss is a matter of fairness
Several readers have questioned the fairness of the proposal not to provide cash refunds of imputation credits.
One reader questioned the fairness of not providing cash refunds because it favours investment in exchange-traded funds and trusts and not in listed invested companies. Another queried whether it would be fair as has been widely reported for the proposal to mainly affect low income taxpayers and many SMSF members and not investors in retail and industry pension funds. Another sceptically said the proposal would impact only on the poorly advised and others not able to restructure their affairs.
These are difficult matters. The objective of the proposal is to reduce the cost of the imputation system in the context of an ageing population with a growing number of people subject to no or a low income tax rate. But as Paul Keating discovered in 1987, denying tax-free super funds access to franking credits resulted in changed investment strategies to avoid paying company tax. One year later in 1988 the government taxed super fund income at 15 per cent to allow it to encourage funds to invest in domestic shares by granting them access to imputation credits.
Until the current system was introduced in 2001, low-income taxpayers including pensioners, non-taxable charities and pension funds were still penalised when investing in domestic shares by not being eligible to claim the full value of their imputation credits.
Today the system operates fairly. All resident investors are eligible to claim the full value of imputation credits as a reduction in tax payable or a cash refund when they receive franked dividends.
Singling out selected low or no tax entities as being ineligible to gain the full benefit of the available imputation credits creates inequities such as those highlighted by my readers. If the funding problem is created by the rapid growth in assets by non-taxable pension funds, the Keating approach of increasing the tax rate payable by the frank dividend recipient, for example by taxing all pension funds (even at 5 per cent or 7.5 per cent) would raise the revenue needed to finance the continued refund of franking credits to all eligible domestic investors. Such a change would impact equally on all pension fund investors and not distort decisions on whether to invest in Australian dividend paying shares.
Alternatively, if the imputation credit system is considered too costly to sustain, limit the available franking credit to, say, 90 per cent of the company tax paid. That would also treat all investors fairly.