A QUESTION OF THE INTEGRITY OF THE DIVIDEND IMPUTATION SYSTEM WHEN CORPORATE TAX RATE CHANGES:AN AUSTRALIAN STUDY
By H. Khiem (Jonathan) Nguyen
This study examines the dividend imputation system adopted in Australia, one of a few OECD countries that still operate a full imputation tax system. The Australian government recently announced corporate tax rate cuts, providing an opportunity to study the potential effects that corporate tax rate changes may bring to an imputation tax system. This paper analyses the proposed changes to the imputation system put forward in the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 and suggests that such changes could potentially cause distortions to the existing imputation system in Australia. The potential distortions include the discrepancy between the tax rate used in computing company’s tax liability and the tax rate employed as a basis for imputation, the additional tax payment required at domestic shareholder’s level upon receiving franked dividends, and the wastage of franking credits arisen from previous corporate tax payments. Furthermore, this paper suggests consideration of an extension period of four or five years, during which companies in Australia can still apply the imputation (franking) rate based on the 30% company tax rate in respect of the dividends paid out of the underlying profits that were previously taxed at the same rate of 30%.
OPTIONAL DISTRIBUTIONS UNDER NEW ZEALAND’S IMPUTATION AND RESIDENT WITHHOLDING TAX SYSTEMS
By James Murray
This paper reviews the taxation of optional distributions in New Zealand. Three types of optional dividend plan have been used: bonus election plans, dividend reinvestment plans and profit distribution plans. This paper also looks at share repurchases which are similar to optional dividends as they also give shareholders a choice between cash and shares. Originally each type of optional dividend was taxed according to its component transactions, but their taxation was subsequently aligned due to their economic similarity and to minimise opportunities for dividend streaming. However, although share repurchases are similar they are taxed differently, potentially allowing dividend streaming. Dividend reinvestment plans are the most common form of optional dividend used in New Zealand, despite profit distribution plans providing much higher levels of reinvestment. This paper identifies issues with calculating resident withholding tax (RWT) on taxable bonus issues and the misalignment of company, RWT and personal tax rates as possible reasons why companies are not using profit distribution plans.
REGULATING THE REGULATOR: ASSESSING THE EFFECTIVENESS OF THE ATO’S EXTERNAL SCRUTINY ARRANGEMENTS
By Sunita Jogarajan
In April 2016, the Standing Committee on Tax and Revenue (‘SCTR’) published its ‘Report on the External Scrutiny of the Australian Taxation Office’.1 The report was the result of concerns raised by the Australian Taxation Office (‘ATO’) that it faced excessive external scrutiny. The SCTR’s terms of reference focused on the issues of duplication and overlap of reviews, cost to government of the reviews, and differential regulation (whether the ATO had demonstrated good risk management and high standards of performance such that differential regulation permitted by the Public Governance, Performance and Accountability Act 2013 could be extended to reduce its external scrutiny). The SCTR found that the substantial external scrutiny placed on the ATO was warranted in light of the ATO’s considerable resources and power, and importance to the general system of government. However, the SCTR only touched on the effectiveness of existing external ATO scrutiny arrangements in its report, as this question was not within its terms of reference.