Loading Because of this change, Australia is the only country in the OECD with a fully refundable dividend imputation credit system. It is, therefore, not surprising that most people don’t understand how the system works and are easily spooked by the sort of misleading nonsense spouted by vested interests like fund manager Geoff Wilson. So what’s the truth? Put simply, for retiree shareholders who pay no income tax, a dividend imputation credit is a cash payment rather than a refund. Since 2000, if you are paid a dividend and have insufficient other taxable income to pay personal income tax during the same financial year – and, as income from superannuation funds is tax free, many wealthy retirees pay no income tax regardless of how much money they earn from their super – you receive a cheque from the ATO in the amount of the tax the company paid. In essence, other taxpayers are funding cash payments from the ATO to shareholders living off investment income who do not pay any income tax.

Loading The ALP proposes to restore the original dividend imputation system introduced in 1987, under which imputation credits can be used to reduce tax to zero, but not into negative territory to create a cash payment. While non-taxpayers will no longer receive cash from the ATO, they will still not be paying tax, so this is not a return to double taxation. The various tax concessions in the superannuation system allow high-income earners to build up very large super balances. Those with the means can sacrifice part of their income to put extra money into superannuation, tax free. Many high-income earners operate their superannuation funds as vehicles to minimise tax and build up large capital savings. As a result of such incentives, the aim of wealthy retirees is to live off the earnings of the dividends from their self-managed super funds, but not to draw down on the capital by selling any shares.

Loading Because your superannuation sits outside your will when you die, superannuation is used as a key part of estate planning by the wealthy – that is, saving a lot of money to pass on to your children as an inheritance. As Australia does not have death duties, this wealth is passed down tax free. This leads to significant intergenerational wealth transfer and, ultimately, reduces social mobility and exacerbates economic inequality. The current imputation cash refund system is, essentially, a reverse death duty: low and middle-income earners are subsidising the estates of the very wealthy by giving them cash payments from general revenue – that is, from all taxpayers’ contributions to the federal budget – so they don’t have to draw down on their own savings but can hoard that money for their own kids. It’s both unfair and, at an annual cost of more than $5billion in forgone revenue annually, unsustainable.

Labor’s proposed changes are projected to raise $10.7 billion, in the first two years, and $55.7 billion over a decade. Given the challenge of funding the National Disability Insurance Scheme, our early childhood education and aged care sectors, and our schools and hospitals, this a responsible measure by which to raise revenue without imposing higher taxes on low and middle-income earners. So next time you hear a wealthy retiree complaining about losing their “income” from excess franking credits under the ALP policy, remember that all that may be required for them to maintain their lifestyles is for them to draw down on their own savings, and pass a little less on to their kids, rather than asking working taxpayers to keep subsidising their estate planning. This is an edited extract of the submission by Emma Dawson and Tim Lyons, from public policy think tank Per Capita, to the Standing Committee on Economics’ Inquiry into the implications of removing refundable franking credits.