Removing dividend imputation has unintended consequences
The Federal Government has been urged against removing dividend imputation on the basis that the unintended consequences may outweigh many of the benefits.
RSM Bird Cameron Financial Services financial adviser, Evan Tsipas, said that analysis conducted by his firm suggested that Australians might actually be worse off, on average, if the Government removed the dividend imputation system even after recent reforms had taken effect.
"The removal of dividend imputation may have some positive and negative side effects for business and the economy," he said. "Upon removal, corporations are likely to slash dividends, which would be double-taxed and of less value to Australian investors. We could also see an increase in corporate debt issued designed to reduce tax as corporations can generally deduct interest.
"New debt issued by corporations could be used to embark on share buybacks, new investment and mergers and acquisitions. However from a macro perspective we need to consider whether more debt would increase systemic risk," Tsipas said.
"The second- and third-order effects of the removal of dividend imputation need to be studied carefully. Encouraging companies to reduce dividends and increase leverage may put the Australian economy in a poor position to handle its next crisis."
He said opponents of the current system might argue it favours the wealthy who have a large exposure to Australian shares and that it was true that wealthier Australians who own Australian shares would be more greatly impacted by the removal of the dividend imputation system.
"However, if the average Australian superannuation investor is tens of thousands of dollars worse off over a 30-year period upon removal of dividend imputation, they could experience a more meaningful drop in living standards, as compared to a wealthier individuals who can better cope with the elimination of franking credits. These new proposals are in direct conflict with the desired outcomes of recent reform," Tsipas said.
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