Showing posts with label taxation. Show all posts
Showing posts with label taxation. Show all posts

Wednesday, 13 February 2019

Australian Tax Office Excess Franking Credits: “When people next receive their dividend refund cheque from the government, remember the government has had to borrow that money”



The Australian Government's public debt stood at an estimated $541.73 billion and growing on 8 February 2019.

On 8 February 2019 in Sydney economist Stephen Koukoulas made a short three minute statement before the House of Representatives Economics Committee ‘inquiry’ into the Labor Federal Opposition’s policy to eliminate excess franking credits.

Excess franking credits are refundable to a shareholder who receives a dividend but has no tax liability to use those franking credits against. 

It is free money - money for jam - granted to shareholders for the last eighteen years under a Liberal-Nationals federal government tax policy.

By 30 June 2015 these excess franking credit refunds were costing the federal government an est. $2.54 billion annually and, are currently estimated to be costing the Australian Government well in excess of $5.9 billion each year.

Below are the notes Koukoulas used for that oral Statement which boiled down to two issues, the cost to the budget and how the policy is distorting investment decisions from investors and lazy financial planners.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Tax policy is always riddled with trade offs.

No government wants to tax anyone more than it needs to, nor should it impose a tax regime that is unfair if it means cuts to services, a heavy tax impost on others in the community or adds unnecessarily to the budget deficit and government debt.

Labor’s policy on refundable franking credits will impact the budget bottom line by more than $5 billion a year.

Without the change, this $5 billion, or $100 million a week, means less money is available for the government to provide health care, roads, education, disability assistance and defence.

It is disconcerting that every dollar of refundable franking credits is currently borrowed by the government.

When people next receive their dividend refund cheque from the government, remember the government has had to borrow that money:

… every cent of it.

… this adds to government debt that will have to be repaid one day in the future by our children and our grandchildren.

I think this is unfair.

The policy also distorts the way we Australians invest our savings.

Many investors put money into companies that pay high, fully franked dividends regardless of the underlying strength or potential of that business.

Look at Telstra. The banks.

It is blind, uneducated and lazy investing recommended by lazy financial planners.

It is only the dividend, not the underlying strength of the business, that guides the investment decision.

This is one reason why the Australian stock market is still 15 per cent below the 2007 peak, while the US, German and Canadian stock markets are substantially higher.

None of these countries have refundable franking credits.

Investors in those countries provide finance to dynamic growth companies and strong businesses.

In Australia, such companies are often shunned by investors because they pay no or low dividends.

Investors instead place their money with what are average firms that structure their businesses according to tax policy distortions.

Imagine if the ASX was at 10,000 points, not the 6,000 point level prevailing today?

I suspect the concerns about dividend refunds would be trivial.

The Australian tax distortions mean that local entrepreneurial firms have less access to local capital.

The money is instead tied up in dinosaur companies paying high dividends.

It is one reason why so many of the 21st century technology and start up firms in Australia head overseas to pursue their business models.
This costs the Australian economy growth and jobs.

With the policy change on refundable franking credits, there will be a greater incentive to invest in companies and other assets for reasons of growth and entrepreneurial flair…

… which will be a positive for the economy and jobs …

… and it will be good for the long term future of Australia.

Thank you
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Thursday, 7 February 2019

The truth about dividend imputation/franking credits that Morrison and Co are not telling you


“Example – low taxable income A self-funded retiree couple has a $3.2 million super balance, plus their own home, and $200,000 in Australian shares held outside super. Even after drawing $130,000 a year in superannuation income, and $15,000 a year in dividend income, they would report a combined taxable income of $15,000, and pay no income tax at all.” [Australian Labor Party, Fact Sheet, 2018]

In 1987 the Hawke Labor Government introduced legislation which changed taxation law regarding dividend imputation/franking dividends.

In order for tax on dividends not to be paid twice – once by the company issuing the dividends via underlying company tax on profits and once by the shareholding receiving those dividends – it introduced franking credits. Whereby the tax on dividends for which the shareholder has previously been liable was credited to them for use in a given financial year to offset all or part of their tax liability for that year*.

Any excess franking credits could not be used as there was no shareholder tax liability remaining to which these credits could be applied and, therefore no chance that any dividends were being taxed twice.

In 1997, 1999 and 2000 the Howard Coalition Government changed the rules on franked dividends until by July 2000 excess franking credits became fully refundable and a great many shareholders began to receive cash tax rebates from the Australian Taxation Office (ATO) for taxation that they had never personally paid.


CommSec explains the franking credit system this way (retrieved 4 February 2019):

Dividends are paid out of profits which have already been subject to Australian company tax which is currently 30%. This means that shareholders receive a rebate for the tax paid by the company on profits distributed as dividends.
These dividends are described as being 'franked'. Franked dividends have a franking credit attached to them which represents the amount of tax the company has already paid. Franking credits are also known as imputation credits.
You are entitled to receive a credit for any tax the company has paid. If your top tax rate is less than the company's tax rate, the Australian Tax Office (ATO) will refund you the difference.
Case study: James receives a tax refund

James owns shares in a company. The company pays him a fully franked dividend of $700. His dividend statement says there is a franking credit of $300. This represents the tax the company has already paid. This means the dividend, before company tax was deducted, would have been $1,000 ($700 + $300).

Come tax time, James must declare $1,000 (the $700 dividend plus the $300 franking credit) in his taxable income. If his marginal tax rate was 15%, he would have paid $150 tax on the dividend. Because the company has already paid $300 in tax, James will receive a refund of the difference, which is $150.

If James was in a higher tax bracket he may not have been entitled to a refund of any of the franking credit, he may even have to pay additional tax. However, if he is a low [taxable] income earner, it is possible to be refunded the full amount of the franking credit…..

Refunding of excess imputation credits

The refund applies when your total imputation credits that are attached to your franked dividends paid exceeds your basic income tax liability for the year.

A cash amount can be refunded to you reflecting the amount of excess imputation credits, after applying them and any other tax offsets to which you are entitled to. This will in turn reduce your basic income tax liability to zero.

If you are required to lodge an income tax return, you can use it to claim a refund of excess imputation credits. If you are not required to lodge a tax return, the refund is available on application.

In other words, if “James” after deducting all other tax concessions available to him finds himself with zero tax liability then since July 2000 he has been able to claim a cash tax rebate from the ATO on tax he has never personally paid.

There are an estimated 1.1 million shareholders receiving this type of rebate on a tax they haven’t paid and they are currently costing the Australian Government well in excess of $5.9 billion each year. 

That’s billions of dollars that should rightly remain in Treasury to help cover the costs of things like national infrastructure, defence, health, education, aged care, pensions and other social services.

In 2017 the Labor Opposition announced that if it won government in 2019 it would return the franking credit rules to their original intent and no longer allow excess franking credits to be realised as ATO cash tax rebates – with the exception that shareholders who also receive a Veterans Affairs or Centrelink full or part age pension or an allowance would still receive a full cash tax rebate for their excess franking credits commencing July 2019.

Whenever Prime Minister Scott Morrison, Treasurer Josh Frydenberg or one of his other cabinet ministers and backbenchers like the MP for Goldstein Tim Wilson open their mouths on the subject of excess franking credits they are very careful not to let truth escape their lips - until such time as they get found out.

A case in point is Tim Wilson's financial interests. A subject which became sensitive once his irregular behaviour as Chairman of the Standing Committee on Economics'  
Inquiry into the implications of removing refundable franking credits became public knowledge.

This is a snapshot of a part of his financial interests. As a 50 per cent holder of equity in at least two investment/superannuation funds which may benefit from excess franking credits:

Register of Members Interests- 45th Parliament - Tim Wilson, excerpt February 2019




Tim Wilson is also an investor in funds run by Wilson Asset Management, a firm founded and chaired by Geoff Wilson with $3 billion in funds under management Under an entry listed as a 'shareholding', Mr Wilson's register of parliamentary interests shows he and husband Ryan Bolger invested in a Wilson Asset-managed fund in May 2017 through the couple's self-managed superannuation fund. They invested in another Wilson Asset fund, WAM leaders, in December 2017.

It has been further reported in mainstream media that Chairman & Chief Investment Officer of Wilson Asset ManagementGeoff Wilson, is in fact a relative of Tim Wilson and, that during one public hearing Geoff Wilson gave evidence before Tim Wilson as inquiry chairman and neither declared their personal or financial relationship. 

Indeed, Tim Wilson could now be considered ethically compromised  in his role as Chairman of the Standing Committee.
Australian Parliament, House of Representatives Practice 6th Edition


Wilson is a politician whose statements and opinions on excess franking credits cannot be trusted, heading a a parliamentary inquiry whose formal report and findings cannot be trusted.

So it is up to every voter to acquaint themselves with the facts. Make Internet search engines your friends between now and the May 2019 federal election if you want the facts on legislation and policy which is being debated in the media.
* Currently an individual's personal tax liability is calculated only on income above the first $18,200 which is exempt from taxation.

Monday, 14 January 2019

The Morrison Government has given permission for oil and gas exploration in NSW coastal waters by a company set up as a tax minimisation ploy


Those Liberal-Nationals MPs and senators preparing to return to Canberra late next month appear determined to annoy NSW voters - especially those who live in coastal communities.

Having wrecked the Murray-Darling freshwater river system that runs through four states, they have now turned their eyes towards the coastal commercial and recreational fishing grounds of New South Wales.

This is how it is playing out........

Asset Energy Pty Ltd holds an 85 per cent interest in Petroleum Exploration Permit PEP11an offshore petroleum exploration lease covering 4,649 square kilometres in Commonwealth waters off the coast of New South Wales.

Asset Energy is a wholly owned subsidiary of the Melbourne-based (formerly Perth-based) mining company MEC Resources Ltd’s investee company Advent Energy Ltd.

Bounty Oil and Gas NL is the junior joint venture partner in PEP11 holding a 15 per cent interest

Newcastle Herald, 9 January 2019

In March 2018 the National Offshore Petroleum Safety and Environment Management Authority (“NOPSEMA”) gave approval for a survey which acquired high resolution 2D seismic data over the Baleen prospect, approximately 30km southeast of Newcastle, which evaluated (amongst other things) shallow geohazard indications including shallow gas accumulations that can affect future potential gas drilling operations.

NOPSEMA falls within the portfolio of Australian Minister for Resources and Northern Australia & Nationals Senator for Queensland, Matt Canavan.

That particular survey has been completed and on New Year's Eve 2018 MEC Resources informed the Australian Stock Exchange that it now intends to do 3D seismic mapping in the vicinity of the potential test drill site at the earliest opportunity.

Underwater seismic testing involves continuous seismic airgun blasts approximately every 2-3 seconds for 24 hours continuously, for days or weeks at a time. That is, such testing creates compressed air streams or focused sonic waves - in simple language, loud booms - towards the ocean floor in order to gauge the depth, location and structure of the oil or gas resources. The sounds of which can travel many thousands of square kilometres and which are known to have a negative effect on marine ecosystems.

Previous to this, on 15 May 2018 the NSW Parliament had called on the federal government to suspend Asset Energy’s permit to conduct seismic testing off the coast of Newcastle, with the NSW Minister for Resources and Energy & Liberal Party Member of the Legislative Council Don Harwin expressing a lack of confidence in Australia’s current offshore mining regulations.

The Morrison Coalition Government in Canberra appears to be ignoring NSW Government  and community concerns. Being more concerned itself with offering tax free investment opportunities to the market.1

It is worth noting that any significant Advent Energy/Asset Energy drilling rig (left) mishap has the potential for an uncontrolled release of untreated oil into coastal waters.

It is reportedly intended that one or more exploration drilling rigs should be in place sometime in 2020.

MEC Resources (formerly MEC Strategic Ltd) is a registered corporation which only been in existence for the last thirteen years and for the last three years there has been a bitter rift between the board and certain shareholders involving repeated calls for removal of the entire board, with the last call for a spill occurring in November 2018. The company was also involved in a dispute with a former managing director, as well litigation involving a $295,000 loan.

One of the shareholder bones of contention appears to be the cost of exploration in PEP11. On 31 October 2018 MEC Resources informed the stock exchange that a cost reduction plan remains in place to ensure all costs are reduced wherever possible.

Questions raised about the rigour of offshore mining regulations covering PEP11 and an oil & gas exploration company determined to cut costs. What could possibly go wrong? 

Concerned readers can sign Stop Seismic Testing Newcastle's change.org petition to Minister Canavan and NOPSEMA here.

Footnotes

1. www.mecresources.com.au, Tax Advanatges, retrieved 10 January 2018:

MEC is a registered Pooled Development Fund (PDF). PDF shareholders pay no capital gains tax on the sale of their PDF shares. Investors who receive dividends will also be exempt from income tax on dividends.

This can be particularly attractive to both traders and investors, since any profits derived from trades or investments are tax-free or low tax. The Pooled Development Fund Programme was established by the Federal Government to develop the market for patient venture capital for growing small and medium enterprises and to provide a concessional tax regime to encourage such investments. Any capital losses on the sale of PDF’s are not deductable.

To encourage investors, the government offers tax benefits to both the PDF and its shareholders as follows:
capital gains made by PDF shareholders are not taxable,
shareholders can elect to treat dividends paid by a PDF as tax free,......

PDF’s tend to invest in a portfolio of growing companies, thereby potentially reducing investors’ risk through diversification. Investee companies have the potential to become listed companies in their own right, which has the possibility of providing investors with attractive returns.

This is not a complete list of the taxation issues surrounding Pooled Development Funds. For further information please contact AusIndustry.

See  Pooled Development FundsAct 1992 as amended up to September 2018.

Monday, 7 January 2019

Why has Australian Treasurer & Liberal MP for Kooyong Josh Frydenberg morphed into a frenzied Trump?


“Ultimately, a dollar of tax avoided by high income Australians is an extra dollar of tax paid by all other Australians.” [Australian Labor Party (ALP) policy document Positive plan to help housing affordability]

The Australian Labor Party has put forward a number of policies which limit the degree to which affluent groups in our society can manipulate the tax system.

These tax reform policies will:

* limit negative gearing to investment properties already negatively geared and newly built residential housing. However net income losses on existing negatively geared properties will not be able to be used to offset salary & wage income;

* cease cash refunds for excess dividend imputation credits on which the investor personally paid no tax originally and who has no current tax liability to offset with these credits;

* reduce the discount on capital gains tax from 50 per cent to 25 per cent after the deduction for any capital losses. Some assets and events are exempt from capital gains tax. These include selling your principle home, personal car, personal use assets or selling an asset acquired before capital gains tax was introduced on 20 September 1985. 
According to the Australian Taxation Office if you are an individual rather than a corporation then the Capital Gains Tax Rate is the same as your Income Tax Rate in the applicable year.

These same policies have caused former Deutsche Bank director, current Australian Treasurer and Liberal MP for Kooyong Josh Frydenberg (left) to morph into a frenzied Trump. Pumping out slogans, misrepresentations and sometimes downright political lies on every media platform he can access.

The Australian, 5 December 2018, p.2:

Josh Frydenberg has launched a pre-election assault on Labor’s plan to halve the capital gains tax discount, warning that hundreds of thousands of Australians will be taxed at the “highest rates” in the Western world.

Shifting his focus from Bill Shorten’s proposal to limit negative gearing to new dwellings and the “retiree tax”, the Treasurer yesterday cited government analysis that showed Australians would be taxed up to 36.75 per cent on their capital gains under Labor’s policy, up from 23.5 per cent now….1


So why is Frydenberg screaming misrepresentations at the top of his lungs, urged on by the Housing Industry Association?2

Could it be because 56.2 per cent of the tax benefits from Negative Gearing go to individuals whose incomes are in the top 20 per cent of Australian incomes and only 5.2 per cent of the tax benefits go to individuals in the lowest 20 per cent of incomes?

Or because est. 75 per cent of tax savings from Capital GainsTax discounts go to the top 10 per cent of high income families?

Perhaps it’s because Self-Managed Super Funds are a major beneficiary of cash refunds for excess dividend imputation credits, with 50 per cent of the benefit to SMSFs accruing to the top 10 per cent of SMSF balances and some funds receiving cash refunds of more than $2.5 million a year?

Likely he’s screaming because all three instances represent how successfully the affluent have gamed the tax system to date and he like most right-wing politicians see such tax manipulation as a right belonging to them and their mates and, therefore have no interest in supporting a fairer distribution of the tax burden.

He also appears to be ignoring the fact that Treasury modelling of these Labor policies shows an increase in federal government revenue by $2 billion over time and, that these same policies have the potential to put downward pressure on property prices in the short-term so that genuine first home buyers might get a foot in the door with more affordable residential housing.

Bottom line is that Labor’s tax reform policies are primarily targeted at investors with a marginal tax rate (including Medicare Levy) of over 45 per cent - which roughly equates with the top 20 per cent of Australian residents with private wealth.

That is, the 'professional' investors/tax avoiders amongst the 1.16 million Australians who according to Credit Suisse in 2017 are millionaires, some many, many times over.

Footnotes

1. KPMG, Demark- Taxation of investment income and capital gains: Interest and rental income are taxable as investment (or capital) income with a marginal tax of 42 percent (2018). Denmark's Capital Gains Tax Rate is higher than the worse case scenario of up to 36.75 per cent under Labor which Frydenberg postulates in Para 5 of this post. Therefore Labor would not be imposing "the highest" rates in the Western world'.

2. Australian Government, Treasury, Tax- Negative Gearing/Capital Gains, FOI, 5 January 2018.
    Shadow Treasurer Chris Bowen, A FAIRER TAX SYSTEM: DIVIDEND IMPUTATION REFORM, 13        
                      March 2018.
    Australian Taxation Office,  Individual Income Tax Rates 2018-2019 and CGT assets and exemptions
    National Australia Bank, Calculating and Paying Capital Gains Tax
     Domain.com.au, The ‘little known’ tax strategy some millennials use to amass large property portfolios,           23 May 2016.

* Photograph of Josh Frydenberg from msn.com

Friday, 13 July 2018

How Trump's corporate tax cuts played out in the US economy



Crikey.com.au, 10 July 2018:

Evidence is now emerging of just how extraordinarily wasteful Donald Trump's trillion-dollar corporate tax cut has been as the results -- or lack thereof -- filter into the real US economy.

It's now well-established that the bulk of the tax cuts have gone into record-breaking share buybacks and increased dividends by US companies, with hundreds of billions of dollars flowing or set to flow back to investors. But not a lot of the rest is flowing into extra investment -- the raison d'etre of company tax cuts. New investment data shows US equipment investment fell in the first quarter of the year compared to the final quarter of 2017. How about wages, which are supposed to increase due to company tax cuts (at least according to Mathias Cormann)? In June, monthly wage growth in the US fell to 0.2% from 0.3% in March, lower than expected and leaving wage growth at 2.7% for the 2017-18 year. Inflation in the US was 2.8% for the year to May, suggesting US workers are actually going backwards after inflation.

US unemployment is at 4% (up a tad) — far below our own level of 5.5%. Like the Kiwis, the Americans can’t get wages to grow even with full employment — or even with tax cuts that have massively inflated the US deficit at a time of peak employment.

The fact that Trump and his GOP cronies have pushed the US budget deficit toward $1 trillion a year (remember when the Republicans were the party of fiscal restraint?) at a time of such strong employment also has implications for the stimulatory effect of such largesse. New research from the San Francisco Federal Reserve shows that fiscal stimulus is significantly weaker at times of expansion than during recessions, and that the Republican tax cuts will not meet what the paper terms the “overly optimistic” expectations of boosters. Instead of the boost to US GDP growth this year of about 1.3 percentage points estimated by the Congressional Budget Office and other forecasters, they write, “the true boost is more likely to be less than 1 percentage point,” with some studies pointing to as little as zero.....  

Read the full article here.

Tuesday, 26 June 2018

All income groups strongly favour the Labor tax plan, according to Essential Research survey


In this Essential Research survey half the people polled preferred the Shorten Tax Plan over the Turnbull Tax Plan - including 30 per cent of Coalition voters.

That is a 5 per cent increase in support for the Shorten plan and a 4 per cent loss of support for the Turnbull plan since last month.

Essential Report, 19 June 2018:


Friday, 11 May 2018

Entrenching inequality in the Australian way of life


There are no real winners in this 2018-19 federal budget – everyone loses something because funding/staffing cuts include services which affect the smooth running of the country, such as regulatory oversight, law, policing and communication. 

Partial winners in the longterm are those in the two highest income/asset deciles. The Anthony Pratts, Gina Rineharts, 'Twiggy' Forrests, Bruce Mathiesons, Malcolm Turnbulls and Peter Duttons of this world.

Those losing the most are low income households, especially those dependent on welfare payments and those with an annual  salary/wage between $41,000 to $87,000 because they will be assessed under the same tax rate as now but with less of the tax benefit pie on their plates in the future.


Federal Budget 2018 Facts of Life - a non-exhaustive list

* Funding in this budget does not fully compensate for funding cuts and tax increases in the last three federal budgets.

* Cuts from previous budgets are still impacting on health services; education funding for schools and vocational studies have been reduced by a combined total of $17.27 billion, funds for the public broadcaster are frozen representing a loss of $84 million on top of $254 million in budget cuts since 2014.1

* Cuts are also occurring in:

Australian Securities and Investments Commission (ASIC) with permanent funding  cut from $346 million to $320 million over two years and staff numbers reduced by 30 investigators in the next year.

Office of the Director of Public Prosecutions with funding cut from $77.4 million to $73.75 million in two years.

The Australian Federal Police funding cut from $1.03 billion to $926 million within four years.2

* Although the federal government is contributing $43 billion, to fund what it calls its “share” of the National Disability Insurance Scheme (NDIS) from 2018–19 to 2021–22, there is still no dedicated funding stream for NDIS.

* Rural, regional and remote area health is only receiving 16.66 million a year for five years to improve health outcomes in those areas across Australia – none of which appears to go directly to treatment of patients or additional services.

* Personal income tax cuts aren’t being offered to those on taxable incomes below $20,548 per annum. Those workers with a taxable income of $20,548 will receive $1 a year in income tax relief. It is reported that the full range of personal income tax relief (which provides the most benefit to the highest earners) will eventually cost est. $17.8 billion annually in lost government revenue if scheme continues until 2027.3

* Individuals earning $100,000 to $125,330 per annum now receive a low and middle income income tax offset despite being in high wage/salary deciles.

* There are estimated 101,508 older Australians on the waiting list for appropriate home care packages.4 At least 60,000 of these do not have even the initial lowest level of home care package and, all the federal government is offering is funding for an extra 14,000 high level packages still leaving 46,000 elder people with no hope of receiving assistance in the foreseeable future to keep living at home.

* There is a proposal to change the progressive tax system from 2018-19 so there are only four income tax brackets and people with incomes from $41,000 to $200,000 per annum will pay the same tax rate. This means that est. 62 per cent of future benefits would go to the highest salary/wage earners with only 7 per cent going to those on the lowest wage.
According to Budget Strategy and Outlook Budget Paper No. 1 2018-19; When completed, the plan ensures that about 94 per cent of taxpayers are projected to face a marginal tax rate of 32.5 per cent or less in 2024–25.

* People over retirement age receiving the Age Pension are being urged to consider funding part of their retirement through the Pension Loans Scheme which will be expanded on 1 July 2019, with the available fortnightly loan plus pension amount increasing to 150 per cent of the maximum rate of fortnightly Age Pension. The current maximum fortnightly pension amount is $907.60. This loan will normally be repaid when the secured real estate asset (usually the principal home) is sold or from the pensioner’s deceased estate.6

* This budget continues the funding model which skews federal primary and highschool funding towards private schools via the Quality Schools scheme with funding for government schools set at $7.6 billion and non-government schools at $11.8 billion in 2018-19 increasing to $9.6 billion and 13.8 billion in 2021-22 .7

* The Northern Territory remote area Aboriginal children and schooling component has been cut by over $47 million across the next four financial years.

*TAFE further technical education funding has been cut by $270 million on top of previous budget cuts.

* The Goods and Services Tax has been extended to cover online hotel bookings made via offshore websites. This is expected to raise $5 million in the 2019-20 financial year.

* Mobile blackspot program funding ceases in 2019.8

* The cashless debit card trial in Ceduna (South Australia) and East Kimberley (Western Australia) will be extended for another year to 30 June 2019. The federal government refuses to make the costs of this measure public.

* Part or all of a welfare payment will be withheld to clear a welfare recipients court fines or address arrest warrants.

* There has been no increase in unemployment benefits.

* Women & girls necessary sanitary products are still subject to a consumption tax payable at the supermarket/chemist checkout.

* Finally, the Turnbull Government cracked a joke in the budget papers – a new National Energy Guarantee is expected to reduce annual residential power bills by $400 at some unspecified date in the future.9

Footnotes: