Tony Smith (Casey, Liberal Party) Share this | Link to this | Hansard source

I move:

That this House:

(1) notes that 1 July 2015 marks the 28th anniversary of the introduction of dividend imputation in Australia;

(2) recognises that:

(a) the system of dividend imputation introduced by the Labor Government in the 34th Parliament has been maintained and supported by every Government since;

(b) the system of refunding excess imputation credits for the benefit of low income earners and charities, which was introduced by the Coalition Government in the 39th Parliament, has been maintained and supported by every Government since;

(c)dividend imputation has delivered improved operation of Australia’s capital markets and corporate landscape;

(d) the end of double taxation of profits has delivered increased prosperity to everyday Australians who own shares either directly, or through indirect means such as superannuation; and

(e) dividend imputation has encouraged increased share ownership levels throughout the Australian community;

(3) endorses and lends ongoing support to dividend imputation; and

(4) rejects calls to tamper with or discard dividend imputation and reintroduce any double taxation of dividends.

Mrs Bronwyn Bishop (Speaker) Share this | Link to this | Hansard source

Is the motion seconded?

Craig Laundy (Reid, Liberal Party) Share this | Link to this | Hansard source

I second the motion and reserve my right to speak.

Tony Smith (Casey, Liberal Party) Share this | Link to this | Hansard source

Twenty-eight years ago, share ownership was not the domain of the broad population because the tax system conspired against it with punitive double taxation of company profits and personal income. Back then, a dividend paid to a shareholder on the top marginal tax rate was effectively taxed at nearly 80c in the dollar. Not only did these tax settings discourage share ownership for everyday mums and dads, they encouraged all the wrong things in the corporate world. Debt-fuelled inflation of share prices was rewarded over productive investment and the generation and distribution of profits to shareholders. For shareholders, the only viable way to realise profit was through selling the shares after growth in the stock price—rather than receiving a share of the earnings through a dividend.

Twenty-eight years on, things could not be more different. The reason for that is that 28 years ago this parliament passed critical and revolutionary tax reform legislation. Then Treasurer Paul Keating introduced legislation to end the double taxation of dividend income. It began operation on 1 July 1987 and when it did it fundamentally altered the incentives for shareholders and for company boards and management. Australia led the world. The overriding disincentive to pay dividends was turned on its head with shareholders no longer burdened by double taxation. A shareholder with a marginal tax rate above the company tax rate now only paid the difference rather than the aggregate. That system has been maintained by every government since. Indeed in the year 2000 it was extended by then Treasurer Peter Costello to refund excess imputation credits for the benefit of low-income earners and charities. It has been a reform that has, together with the privatisation of government assets, boosted direct share ownership in this country. Critically, it has also altered the corporate landscape and, in our view, underpinned the strength of the Australian economy, anchoring it in so many ways.

There have been some calls to tamper with dividend imputation—indeed some calls to abolish it altogether. Those calls have argued that the dividend imputation system is not attractive to foreign shareholders. In other words, the argument is that we should do away with dividend imputation or tamper with it in order to get a lower company tax rate. The truth is that there would be no prospect of lowering corporate and income tax rates enough to leave Australian shareholders in anything other than a higher tax position.

This motion lends support to the current system and rejects out of hand any of the calls to tamper with it or indeed to do away with it. We are having a debate in this country about tax and that is a good thing. But the purpose is to put a magnifying glass on the failures within the system, not the standout successes. The purpose is to deliver lower, simpler, fairer taxes—not to reintroduce double taxation of dividends. If that were to be done, someone on the top tax rate today would, instead of paying the difference between it and the company tax rate, be paying an effective tax rate of nearly 63c in the dollar. For those people who advocate change, their future is in fact the failed past of 28 years ago.

Along with my colleague, I put forward this motion to send the message that that is not where we want to go. If we were to go back to that place, we would be recreating a failed system. We would be putting all the incentives in the wrong places. It would be the financial equivalent of being ignorant enough and arrogant enough to think we could destroy one of the Seven Wonders of the World and create something better. I commend this motion to the House. I know it has strong support amongst members on both sides.

Craig Laundy (Reid, Liberal Party) Share this | Link to this | Hansard source

I support this motion and congratulate the member for Casey for having put it forward. The member for Casey has raised some excellent points and has gone back through the history of dividend imputation. This was a Keating-Hawke reform and it was visionary. What is often missed about this reform is that it worked hand in hand with the launch of superannuation. Superannuation, which is today sitting at $1.9 trillion, enabled a huge number of people to own shares for the first time. The Australian Foundation Investment Company, in its submission to the tax white paper process currently underway, shows that as of 2012 22 per cent of households with incomes below $50,000 owned shares.

I have two frustrations with most of the discussions about taxation that take place in this chamber. The first is that they take place in a silo, not looking at the flow-on effects and the impact on the economy. The second is that they focus on lines in the budget, on the cost to the budget, without looking at any benefits that may result. The member for Casey pointed out very well the double taxation impact—79c in the dollar versus 30c. There is no rort here, as has mischievously been reported. A company makes a profit, pays its 30 per cent tax, and then any shareholders to whom that profit is distributed pay top-up tax. The effective rate of that top-up tax, for someone on the marginal rate of 49c in the dollar, is 27 per cent. It is simply single taxation that fits in with the marginal tax rate.

Following on from what the member for Casey said, I want to discuss the impact that tampering with imputation would have on small and family businesses. We look at those line items in the budget and we look at the potential imposts, but we never consider what alternative behaviour may result. That is where the conversations on tax in this place always fall over. What would happen? As the member for Casey so well pointed out, dividend imputation enables small- and family-sized business to reinvest in their own business through retained earnings—rather than taking on bank debt—knowing full well that, when they do issue dividends in the future, should they so desire, they will effectively be paying the one top marginal tax rate.

But what do they do with those retained earnings when they invest back in the business? They do two things. They drive further and increased profitability in that business, which is a win for the taxpayer through increased company and top-up tax in the future. More importantly, they employ more people—which is a win for the local economy as well as a win through that future employee's PAYE tax revenue. So dividend imputation is win-win-win—all the way through.

What would happen if dividend imputation were not there? Businesses would restructure themselves. You would move from having a private company to having a sole trader or a partnership. Growth would be inhibited—businesses would have to take on bank debt to grow further—and there would be single taxation at whatever marginal tax rate applied. Alternatively, if you did stay in the company format, you would, instead of paying tax at 79c in the dollar, just increase your wage, decreasing your business profitability and the tax applied to it. In a perfect world, you would probably make your business profitability zero so that you paid no company tax. You would just pay your marginal tax rate of 49c in the dollar on your wage earnings. This is where analysis of tax in this place so often falls over. It just considers lines in a budget paper. It never looks at how businesses will behave as a result of the environment we set as regulators and what the flow-on impacts will be through increased profitability for, and increased tax receipts from, the taxpayer and through increased employment in the local economy. As a federal member, I can tell you how important that is. Further, when we set the regime, we need to recognise that certainty is the key to sustainability.

The member for Casey is on the money with this motion. I know that I have come at it from a different angle than he did, but I think it is just so important that both sides get behind dividend imputation and keep it in place. It was a Hawke-Keating reform and it was a great reform.

Debate adjourned.