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Wednesday, 10 December 1986
Page: 3694


Senator COOK —My question is addressed to the Minister for Finance representing the Treasurer. It is in the nature of a Christmas box question. What are the benefits of the full tax imputation system announced by the Treasurer at 1 p.m. today?


Senator WALSH —The first point to observe about the tax imputation policy is that it will remove the double taxation of company profits which had previously applied; that is, taxation in the first instance in the hands of the company and, in the second instance, in the hands of the shareholders on the dividends distributed. Under the existing system a dividend paid to a shareholder in the top tax bracket is effectively taxed at the rate of 78.4c in the dollar, leaving 21.6c for the shareholder. The changes announced by the Treasurer today, with the tax cuts, will mean that the 21.6c return will become 51 per cent on 1 July next year; an after-tax return which will be nearly 21/2 times greater than was possible under the previous system. Provided that the dividends are qualifying dividends, the actual tax rate may be less than 49c in the dollar if the shareholder to whom the dividend is distributed has a personal marginal tax rate of less than the maximum rate. For taxpayers in the lower and middle income ranges there is that further benefit. In other words, the company tax on distributed income is effectively abolished and at the same time the Government is abolishing the additional tax on undistributed profits.

The Division 7 tax will no longer be needed because from 1 July next year the significantly lower top rate of personal tax will be aligned with the company tax rate. Incorporation will no longer be necessary as a means of avoiding the 60 per cent tax rate, so retention rules are not required. From the next financial year companies therefore will be completely free to decide whether to distribute or retain income. There will be no dividend or retention tax penalties from either course. The direct cost of the new full imputation system and the abolition of the Division 7 provisions is estimated at almost $500m in a full year. In the Government's initial consideration of the imputation system a new tax, known as compensatory tax, was to be incorporated into the package. The Government has now decided not to impose that compensatory tax.

As a result of major design improvements the new business tax system will proceed as a landmark reform. For all the wailing and caterwauling that used to come from the Opposition over as many years as I can remember about the evil of the double taxation of company profits, the Opposition did not do a thing about it in the seven years it was in government. In the five years that John Howard was Treasurer, what happened? Absolutely nothing happened. The imputation system will do the job that several provisions had previously done. The direct cost of imputation and the abolition of Division 7 will be almost $500m. In addition, the Treasurer announced today that non-residents will not be taxed twice, consistent with the general policy that withholding tax on dividends paid out of taxed income and branch profits tax will be abolished. The estimate of the total gross cost of the package is some $775m. Of course, more than half of that will be offset by the increase in the company tax rate to 49c in the dollar.

This is one of the major components of the Government's tax reform package; this is a move to simplicity which will remove a number of the distortions in the pre-existing tax law. It achieves the sort of policy change that many people have sought for a long time but have not been able to have enacted until this Government came to office. Apart from removing the distortion which is undesirable as a macroeconomic policy measure, it also provides very considerable benefits to the business community and it is about time that the business community recognised that.


Senator Chaney —I ask the Minister to table the paper from which he has quoted.


The PRESIDENT —I take it that the Minister is prepared to table the paper from which he quoted. The Minister has tabled the paper.