The tax treatment of earnings generated from owning shares is complicated. Because it is complicated most people think it is boring. Because it’s boring we don’t discuss it much. However Australia’s dividend imputation system is important, unique to the world and comes with approximately a $30 billion dollar a year price tag. So whatever you think about Bill Shorten and Chris Bowen’s announcement it is a good thing they have got us talking about one of the least understood aspects of tax policy in Australia.

[This article was first published by The Age – here]

The complexity of the Australian tax system hides many sins, one of the most inequitable of which is the fact that some of Australia’s wealthiest citizens pay negative tax. The ATO actually hands other people’s money to some of the wealthiest people in the country. Indeed, while Centrelink chases some of our poorest citizens for seven year old debt, one lucky non-taxpayer actually received $2.5 million in ‘tax credits’ in a single year.

So what on earth is going on? How can some wealthy ‘lifters’ be such expensive leaners? The answer revolves around what had, until yesterday, been a little known feature of the Australian tax system called ‘dividend imputation’. It was introduced by Paul Keating to stop company profits from being ‘double taxed’ but it was modified by Peter Costello in such a way that some profits are now not taxed at all.

When a company makes a profit it pays the 30 per cent company tax rate on that profit. In most countries, after the company pays tax it distributes dividends to its shareholders who, in turn, pay at least some personal income tax on those dividends. But Paul Keating thought that companies and shareholders paying tax was ‘double taxation’ so in 1987 he introduced ‘dividend imputation credits’, which simply meant that any tax paid by the company could be ‘credited’ against any personal income tax payable.

It works like this; the franking credit is essentially a note that comes with the dividends that says company tax has already been paid on the dividend, giving you a discount on that income at tax time.

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 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 can 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.

Remember, this act of extreme generosity comes from our revenue-starved budget and has blown out from initial budget cost of $500 million per annum, to what is estimated to soon be $8 billion a year

Only 4 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.

Australia is the only developed country in the world in having the cash rebate provision that Costello and Howard introduced.

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% of benefits of dividend imputation flowed to households with incomes in the top 10%. Almost half the benefits go to individuals earning over $180,000 who make up only 2.2% 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 @BenOquist