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3 Why Chris Bowen Fails Again To Understand Imputation.
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5 Chris Bowen shows an astonishing lack of comprehension of our taxation system for a
6 person who could be Australia’s treasurer within six months.
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8 For months now, Mr Bowen has tried to justify his unfair and discriminatory franking credits
9 policy. The policy is simply debunked using only junior high school arithmetic and a bit of
10 common sense.
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12 Criticism of the policy has been solid, primarily from those who know and are involved with
13 our imputation system on a regular basis, and understand how it works.
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15 For the majority of people, the term “franking credits” is just a funny phrase with no
16 particular meaning, other than Labor describe it as a “loophole, an anomaly, and a tidy little
17 arrangement”. They do so even though our current policy is, with regards refundable
18 franking credits, basically the Labor policy taken to the 1998 election.
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20 Mr Bowen claims, for example, that the cash-refund of excess franking credits is an
21 “anomaly” which needs to be fixed, and that the “cost” of cash refunds is now
22 “unsustainable”.
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24 Both these claims are absurd.
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26 Where Bowen’s franking policy is particularly disconcerting is that it shows a remarkable
27 lack of understanding of Australia’s imputation system, how it works, and why it works.
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Authorized by John Griffith Newcastle NSW


29 The worry in all this is that the Imputation system is one of the easiest taxation components
30 to comprehend. The principles involved would probably be discussed in the first term or
31 two, in a beginner’s book-keeping class in business college.
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33 The fact that Mr Bowen is promoting this system and calling it a “fairer” tax system is
34 laughable.
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36 For example, recently a critic of Mr Bowen, Mr Geoff Wilson of Wilson Asset Management
37 rightly pointed out that the cash refund of excess franking credits is, in fact, a refund of
38 overpaid tax.
39 Therefore the denial of a refund of overpaid tax would be unfair. Furthermore since it
40 would only apply to some shareholders, but not all, it is also discriminatory.
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42 This lead to Mr Bowen writing an article in the Financial Review, denying Mr Wilson’s
43 claims.
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45 Mr Bowen confirmed that Mr Wilson has said that the refund of excess franking credits was
46 a refund of overpaid tax, and Mr Bowen denied that it was.
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Authorized by John Griffith Newcastle NSW
50 The simple fact remains, Mr Bowen, cash refunds of franking credits are a refund of
51 overpaid taxes.
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53 It’s only basic arithmetic, Mr Bowen, and there is only one answer in arithmetic, and it is
54 most assuredly that the cash refund of excess franking credits is a refund of overpaid taxes.
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56 So, for Mr Bowen’s sake, here is “Franking Credits 1.01”
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58 What Do Franking Credits Represent:
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60 Franking credits represent the amount of tax which has been paid to the ATO with respect
61 to the gross dividend payments made by a dividend paying company.
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63 For example, prior to a company distributing $100,000 of its profits to shareholders,
64 company tax of $30,000 (30%) is paid to the ATO, in cash, by the company. This represents
65 the company’s tax on its profits.
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67 When the company pays out the dividend to the shareholders, there is only $70,000 of the
68 original $100,000 remaining in cash, so the company pays, to its shareholders a $70,000
69 cash dividend, and provides $30,000 of “attached franking credits”, to signify that $30,000
70 tax has already been paid to the ATO.
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72 What Is Point Of Franking Credits ?:
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74 Under our Imputation policy, tax is only payable once. By the shareholder.
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76 So the tax on dividends are paid by the receiving shareholders, at each shareholder’s
77 marginal tax rate.
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79 But remember that the company has already paid company tax on the profits used to pay
80 the dividend. Because of this, and the fact that only one lot of tax is payable on any
81 dividend, that tax paid by the company is “imputed”, or transferred to the shareholder’s
82 account at the ATO.
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84 Now It Is Simple :
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86 1. The company wanted to distribute $100,000 of income to its shareholders. As
87 detailed above, $30,000 was required by law, to be paid in cash, so only $70,000 is
88 paid to the shareholders. The company has paid out $100,000, as was its intention.
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90 2. The shareholders have received the full $100,000 as $70,000 in cash, and the $30,000
91 of tax, which is now held by the ATO to be used as “pre-paid” tax.
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Authorized by John Griffith Newcastle NSW
94 Franking Credits Refunds As Tax-Offsets:
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96 All Franking Credits, that is all tax paid by a company on profits to used to pay dividends are
97 fully refunded to shareholders. This is true whether the refunds are in cash, or by tax-
98 offsets.
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100 Yet, Bowen’s ill-conceived plan is to withdraw only franking credit refunds as cash-refunds,
101 and not franking credit refunds as tax-offsets.
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103 His rationale for this distinction is flawed since of franking credit refunds as cash-refunds
104 and franking credit refunds as tax-offsets are of identical budgetary effect. Both are
105 refunds.
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107 Most franking credits are refunded to shareholders as “tax-offsets”, about $34.5 Bn per
108 year, and about $5.5 Bn are refunded as “cash-offsets”.
109 Example 1.
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113 The “pre-paid” tax detailed above can be described in numerous ways, but consider this. If
114 an individual shareholder :-
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116  Received a $7,000 cash dividend and $ 3,000 in franking credits. Under present tax
117 law, the total of $10,000 is required to be included in the shareholders taxable
118 income.
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120  If the shareholders taxable income was $40,000 in total, including the $10,000 Gross
121 Dividend, then that shareholders total tax liability on the entire $40,000 is $5,347.
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123  BUT, because the shareholder has $3,000 of franking credits, “pre-paid” tax, the
124 shareholder deducts this amount from the $5,347 tax bill, and pays only the
125 difference, or $ 2,347 to fully pay out the tax bill.
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127 It is clear to see that the tax paid by the company has been refunded to the shareholder.
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129  The total tax received by the ATO was $3,000 + $2,347 = $5,347.
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131  The tax payable by the receiving shareholder was $5,347.
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133  Company Tax Retained by ATO = $0 - It was given to the shareholder as a cash-
134 discount off an otherwise fully payable tax bill of $5,347.
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Authorized by John Griffith Newcastle NSW
136 Bowen’s franking policy continues the policy of fully refunding the corporate tax collected
137 as tax-offsets against shareholders tax-bills.
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139 The main recipients of franking credit refunds as tax-offsets are those with big tax bills. That
140 is, those with big incomes such as the major banks, business, high income earners. Certainly
141 as a group, these taxpayers would be better of than the average self funded retiree.
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143 Curiously, serving Labor politicians would receive any franking credit refunds as tax-offsets,
144 and after Bowen’s changes they would still be able to do so. So they do better than the self-
145 funded retirees.
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147 Franking Credits Refunds As Cash Refunds:
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149 This is where Mr Bowen seems to get lost.
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151 When are franking credits refunded as cash-refunds instead of tax-offsets?
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154 Basically, franking credits are first applied to any tax payable, and if there are excess
155 franking credits after that, those franking credits are refunded in cash.
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157 Clearly, such as cash-refund is a refund of overpaid tax.
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159 Example 2
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161 Let’s do an example involving both a tax-offset, and a cash-refund. We’ll be using similar
162 data to “Example 1”, but we will reduce the shareholder’s income to $25,000 including the
163 $10,000 gross dividend, which reduces the shareholders tax liability on the entire $25,000
164 to $ 1,732.
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166 Again the taxpayer has paid $ 3,000 tax as evidenced by the $3,000 franking credits
167 attached to the $7,000 that was received of the $10,000 gross dividend.
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169 So now, $1,732 of the $3,000 franking credits are used to offset the $1,732 tax-bill. Clearly
170 the shareholder still has $ 1, 268 over franking credits remaining, meaning that, at this
171 stage the shareholder has “overpaid” tax by $ 1,268. Under present arrangements, this is
172 refunded as a cash refund by the ATO to the shareholder.
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Authorized by John Griffith Newcastle NSW
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176 As with Example 1 above, it is clear to see that the tax paid by the company has been
177 refunded to the shareholder.
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179  The total tax received by the ATO was $3,000 - $ 1,268 refunded = $1,732.
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181  The tax payable by the receiving shareholder was $1,732.
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183  Company Tax Retained by ATO = $0 - It was given to the shareholder as a cash-
184 discount off an otherwise fully payable tax bill of $1,732 and the overpaid tax of $
185 1,268 was refunded to the shareholder.
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187 The important things to notice are:
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189  All the company tax received by the ATO was refunded to the shareholder, partially
190 as a tax-offset, and partially as a cash-refund.
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192  The ATO tax receipts are down to $ 1,732 from $5,347 in example 1. But this is not a
193 deficiency in the imputation system, in fact it shows how well the existing imputation
194 system does work.
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196 For example, if the $40,000 income in example 1 was earned at work, the tax paid by the
197 worker would still pay $5,347 tax on that income. Significantly, the wage payer would claim
198 the $40,000 as an expense and deduct the $40,000 from their taxable income. This means
199 that only the worker pays tax on the wage. The boss does not pay tax on the workers wage.
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201 So, if Example 1 was a worker earning the whole $40,000 as wages, the tax outcomes for
202 the receiver, the payer, and the ATO are exactly the same as under the imputation system.
203 In other words, there is no preferential treatment.
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205 Similarly, if the $25,000 income in example 2 was earned at work, the tax paid by the
206 worker would still pay $1,732 tax on that income. Significantly, the wage payer would claim
207 the $25,000 as an expense and deduct the $25,000 from their taxable income. This means
208 that only the worker pays tax on the wage. The boss does not pay tax on the workers wage
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210 So, if Example 1 was a worker earning the whole $25,000 as wages, the tax outcomes for
211 the receiver, the payer, and the ATO are exactly the same as under the imputation system.
212 Even though the ATO refunded the $1,268 to the shareholder, the ATO still retained the
213 $1,732 tax. In other words, there is no preferential treatment.
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Authorized by John Griffith Newcastle NSW


215 Bowen’s franking policy continues the policy of fully refunding the corporate tax collected
216 as tax-offsets against shareholders tax-bills.
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218 Examination of examples 1 & 2 show how unfair, discriminatory and ill-conceived Bowen’s

Under Bowen’s policy the shareholder in example 2 would not receive the $1,268
refund detailed, and so would effectively be paying $3,000 tax when the tax tables
show only $1,732 should be paid.

Even more bizarre is the fact that if the taxpayer in Example 2 earned all the $25,000
as wages, the tax would be $1,732. BUT, if the $25,000 earned included a $10,000
gross dividend the tax paid by the shareholder would jump up from $ 1,732 to $3,000.
For the same taxable income!

219 policy is.


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221 Franking Credits Refunds Where The Taxpayer Has A Zero Rate Of Tax.
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223 This is where Shorten and Bowen really get lost. If the shareholder is a Self-managed Super
224 Fund, or a low income taxpayer, then a Zero (0%) tax rate will apply to income.
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226 Labor erroneously claim that because, in these cases, all the tax paid by the company is
227 refunded to the shareholders, and the shareholders pay no tax, that our imputation
228 system is faulty and needs change.
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230 Labor are avoiding the reality that:

231  All tax paid by all dividend paying companies on income which was used to pay
232 dividends, is fully refunded to the shareholders anyway.
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234  The refunds are either as a tax-offset ($34.5Bn total per year) or a cash-
235 refund($5.5Bn per year). This is clearly shown in Examples 1 & 2 above.
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237  With a 0% tax shareholder, the tax paid by the company is refunded in cash to the
238 shareholder, so neither the company or the shareholder pays tax.
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240 The reason no tax is paid by a shareholder is because the government set a 0% tax-rate for
241 the shareholder. That is what a 0% tax rate means. Furthermore, when a tax-payer pays no
242 tax, the ATO receives no tax.
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244 Labor’s franking policy is no more than a deceptive ploy to claw back tax from taxpayers
245 with a 0% tax rate. Claims that the company tax is lost, is bogus, because in the case of tax-
246 offsets the tax is fully refunded to shareholders and Labor’s policy changes do not change
247 that.
Authorized by John Griffith Newcastle NSW
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