Tax scare campaign has zero substance
PETER Costello has a lot to answer for.
The Howard government Treasurer who presided over one of the longest boom periods in recent Australian history was in reality a wastrel who committed billions of dollars in windfall revenues to recurrent spending that continued to grow long after the good times stopped rolling.
As Treasury has previously noted, a series of generous income tax cuts accompanied by middle-class welfare spending left the federal Budget in structural deficit by the end of the Howard era.
In short the spending, or revenue foregone, was not sustainable over the long term, and this reality was sheeted home in quite brutal fashion with the advent of the Global Financial Crisis just as the Rudd government came to power in 2007.
Now, more than a decade later, Labor if it wins government is still faced with the task of cleaning up the worst of Costello legacy.
Already it has proposed measures to rein in the worst of the excesses associated with negative gearing and Capital Gains Tax discounts, which in no small part have contributed to soaring housing costs as investors use tax breaks to fund asset price speculation.
The other Howard era landmine Labor plans to defuse is dividend imputation, or specifically the ability of (mostly wealthy) Australians to claim a cash refund on used franking credits on shares.
Dividend imputation was introduced by then Treasurer Paul Keating in 1987 to end what he termed "double taxation" of company profits.
This allows Australians who have shares in companies that pay tax (and not all do), to credit that tax paid against their other taxable income, reducing their overall tax liability.
Enter Costello, who with a profligate flourish in 2000 decreed that those Australians who didn't have a tax liability to offset imputation credits against could instead claim a cash rebate.
At the time this was estimated to cost about $500 million, but has since grown to a burden of close to $6 billion a year. Changing the rules could save the budget more than $11 billion over the next four years, and close to $60 billion over the medium term.
What Labor plans to do is basically restore the integrity of the original policy, which will still allow shareholders to use imputation credits to reduce tax, but end the ability to claim cash refunds.
This has led to a situation where, as Labor points out, some wealthy investors who have arranged their affairs so they pay no tax receive cash rebates of more than $2 million thanks to franking credits.
Labor's proposed changes are not in any way a tax grab, but rather closing off a lurk that sees some households engineer things so that their tax rate is in effect less than zero.
As the Australian Institute puts it: "Like most tax loopholes, the ability to convert 'surplus' dividend imputation credits to cash delivers most of its benefits to the wealthiest, with almost half of all franking credits going to the top 2.2 per cent of income earners, and virtually nothing to low income earners."
Don't be fooled by Treasurer Scott Morrison's rhetoric about a "theft" that will target low income earners and pensioners.
This is all scare campaign and zero substance. No-one will pay a single cent more in tax.
Once people are retired the money they draw down from their superannuation accounts is tax free.
Hypothetically you could have a $10 million super fund, be drawing $500,000 a year, and still have a taxable income of nil.
As it stands someone in that situation would be able to claim further cash payments from the Australian Taxation Office for any imputation credits they received.
Nor is revisiting dividend imputation - especially the cash rebates - some mad "class war" scheme dreamt up the socialist left.
As far back as 2009 the Henry Tax Review expressed concerns about dividend imputation arguing that it created investment distortions in an increasingly globalised marketplace.
More recently David Murray's inquiry into the financial system argued that "the case for retaining imputation is now less clear than it was in the past."
At the same time the government's own 2015 tax review white paper concluded that "there are some revenue concerns with the refundability of imputation credits", while earlier this month former Liberal leader John Hewson said "I think the bottom line is that in economic terms, it [cash refunds] doesn't make any sense at all".
Bear in mind too that Australia and New Zealand are the only two countries to offer full dividend imputation, and Australia is completely on its own when it comes to cash rebates for unused credits.
This is an unaffordable extravagance from a different era, and one that is well past its use-by date.