Shareholders will be disadvantaged by Turnbull’s Ten Year Enterprise Tax Plan
08 September 2016
Last week the Federal Government announced the introduction of a Ten Year Enterprise Tax Plan. Sounds impressive, but because of the way the changes have been drafted, it is likely to disadvantage many company shareholders over the next seven years.
What are the changes?
- Reduction to the corporate tax rate to 27.5% progressively between 1 July 2016 and 1 July 2022 for companies, depending on the company’s turnover in a particular year.
- Amendment of the franking system in relation to the amount of franking credits that can be attached to dividends. This is based on the corporate tax rate applying to the company in the year the dividend is paid, assuming the company’s turnover was the same as the prior year.
Why are they unfair?
The franking system amendment takes franking credits for tax actually paid out of the hands of shareholders. Consider this example.
Company A has turnover of $9m and profit of $1m for the 2016 year, and turnover of $12m and profit of $1.3m for the 2017 year. Its tax liability is $300,000 in relation to the 2016 year, and it pays after tax profits of $700,000 as dividends to shareholders in the 2017 year.
Working on these assumptions, Company A’s tax rate would be 27.5% in the 2017 year assuming it had the same turnover as in the 2016 year. As such, it can only frank the dividend with $275,000, rather than $300,000 of tax paid. This means its shareholders lose out by $25,000, as this is tax paid on the profits that they receive as dividends, but which is not credited to them.
What’s the solution?
It would be better and fairer if the legislation assumed the franking rate in a particular year (eg the 2017 year in the above example) was the actual rate of tax applicable in the immediately preceding income year. Alternatively, the franking percentage could be left at 30% as it currently is until all companies are on the same tax rate again.
Companies whose turnover means that they will drop to the lower tax rate in the next year should consider whether they can accelerate dividends payable from current year profits in order to avoid this anomaly in the proposed law.
Thought to take away
Seemingly minor design flaws in our tax system rob it of its coherence and erode public support. Coherent tax reform needs to be the goal.