How some of the wealthiest Australians pay 'negative' tax

Whether Paul Keating’s system of dividend imputation is "fair" or not has never been widely debated in Australia for the simple reason that so few people understand how it works. But what really does not pass the fairness pub test was Peter Costello’s subsequent decision to allow people with "spare" tax credits to swap them for cash.

Before you can understand the full horror of Costello’s changes it is important to remember that he also made income from superannuation funds entirely tax free once you turn 60. That is, if you are over 60 with $10 or $20 million in superannuation, you could literally withdraw millions of dollars per year and pay not a single cent in tax on it. Paying no tax would mean tax deduction credits would be of no use. For example, a very wealthy individual drawing $1 million per year from their superannuation and paying no tax – not even the Medicare surcharge – who received say a $10,000 dividend cheque that comes with $3000 worth of "tax credits". Now imagine the frustration of our retired millionaire who, because they pay no tax, has nothing to offset their credits against.

Luckily for them, Peter Costello changed the law in 2000 to allow any surplus credits to be swapped for cash meaning that rather than paying no tax, they get paid $3000 by the taxpayer.

Only four other OECD countries have a full dividend imputation scheme like Australia’s: Canada, Chile, Mexico and New Zealand. Finland, France, Germany, Italy, Norway used to have such a system but dropped or reduced it to a partial system. Spain, Turkey and UK had partial imputation and dropped that, too.

It is, of course, true that some Australians will be adversely affected by changes to the dividend imputation scheme, but they are by definition those who are paying little or no tax at present. Regardless, the benefits flow overwhelmingly to the wealthiest Australians. Australia Institute commissioned modelling showed that 75 per cent of benefits of dividend imputation flowed to households with incomes in the top 10 per cent. Almost half the benefits go to individuals earning over $180,000, who make up only 2.2 per cent of the population.

Australia is one of the lowest-taxing countries in the OECD. If we are to have to fund the services, schools, hospitals and infrastructure expected by the community we need a sustainable revenue base. Indeed many in the corporate sector know that ultimately businesses can only really flourish if there is a decent society in place. To pay for that decent society and its infrastructure we can either raise tax rates or close concessions, deductions and loopholes. Our dividend imputation system – that is unlike anywhere else in the world – would be a good place to start.

Ben Oquist is the executive director of The Australia Institute.

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