Transitional Rules Must Apply If Dividend Imputation system is shelved: says BDO

11 February 2019

BDO Australia has lodged a submission with the Government on the key priorities for the forthcoming Federal Budget, with a plea to ensure transitional rules are put in place if any changes are made to the Dividend Imputation system.

Dividends paid to shareholders by Australian resident companies are taxed under a system known as imputation. The tax paid by the company is allocated to shareholders as franking credits attached to their dividends. Depending on the tax paid by the company, dividends can range from 0% up to a tax credit of 30%.

BDO National Tax Director, Lance Cunningham, said any changes to the system need to be done carefully, with a level playing field for all investors.

“Similar to the transition with Corporate Tax rate cuts, there must be a phased approach to any dividend imputation rule changes, alongside a good education program identifying the reasons and benefits of such a change,” he said.

The refundability of imputation credits should be reviewed. It is generally accepted by many expert tax commentators that the refund of imputation credits is not good tax policy. However, because this policy has been in place for more than a decade, any change would need to be done carefully with transitional rules that allow investors who have made investments in good faith based on this existing policy to rearrange their investment portfolios to account for any changes.”

“Removing dividend imputation will not increase foreign investment into Australia, but it may encourage Australian companies to use its profits to reinvest rather than being encouraged to payout profits as franked dividends.

BDO’s submission outlines further considerations for any review of the imputation system:

  • There are arguments that the imputation system distorts the capital/debt markets and motivates companies to maintain high dividend payout ratios with a built-in disincentive for companies to invest their profits to expand their businesses, and puts a relative penalty on overseas investments by Australian companies.
  • Many other developed countries have disbanded their imputation systems and most have replaced it with a discount for investment income and capital gains. This could be considered as an alternative to the Australian Imputation system.
  • The dividend imputation system was introduced to stop double taxation of company profits on payment of dividends. However, this only applies in the case of resident taxpayers receiving distributions of Australian company profits. Foreign investors do not receive the benefit of imputation credits.
  • Although the foreign investors do not have withholding tax deducted from franked dividends this is not much benefit to most of them as their home jurisdictions would generally give them foreign tax credits for the Australian withholding tax.
  • It has been argued that this causes an inequity between local investors and those from overseas and would discourage foreign investors from investing in Australia. However, these arguments are not supported by any technical analysis. While the imputation system does give an advantage to resident shareholders, it does not provide a disadvantage to foreign investors as they are not in any worse position (and in some cases better position) than they would be if the imputation system was abolished and withholding tax was therefore applicable to the Australian dividends they receive.


The dividend imputation system has been very popular amongst Australian resident investors and this is evidenced by the results of the BDO Tax Reform Surveys.

The abolishment or modification of dividend imputation to fund company tax rate cuts is an issue considered in the BDO Tax Reform Survey every year and was revisited again in 2018 when 79% of respondents felt it should not be changed as it provides an incentive for Australians to invest in local companies.

This is consistent with the 80% of respondents who expressed this sentiment in 2017 and interestingly, an increase on the 69% of respondents in the 2016 BDO Tax Reform Survey.

Read Lance’s comments to the AFR here.