The countdown to the Australian budget is on. As you know, this always gets plenty of coverage in the mainstream press, with all the associated political to-ing and fro-ing that goes along with it.
But important to you as an investor are the issues the Treasurer has flagged in relation to the treatment of imputation on dividends, and a potential bank deposits tax.
The idea behind the tax stems from 2013 when the then Labor government looked at introducing a levy on bank deposits. It had been recommended by various bodies, including the Reserve Bank, APRA (Australian Prudential Regulatory Authority) and ASIC.
The reason for introducing the levy was to set funds aside in the (unlikely) event of a bank collapse. The levy would be set at 0.05% on all bank deposits up to the Guarantee Level of $250,000, with the funds going into a ‘quarantined’ account. At the time, the Liberal Party opposed the measure, in part because the funds were to be included as ‘revenue’ in the budget. As a result, the proposal didn’t get through parliament.
But now the levy is back on the table. Some have predicted that the Treasurer might even announce it prior to Budget night. To put the levy in perspective, it would equate to about five cents per $100 of funds deposited. For savers it will mean a reduction in term deposit rates as the banks have said they’ll pass on any costs to their customers.
This is yet another reason why investors will need to look for income from a variety of sources, including dividends from shares.
The other issue that raised its head is the potential change in the treatment of imputation. Introduced in 1987, imputation was a means to stop the effective double taxation of company profits. Prior to this, a company would pay taxes on its profits, and so too would the shareholder after they received their dividend.
A benefit on top of the tax credit (you may have heard this called a franking credit) is that it makes it more attractive for locals to invest in Australian based businesses. Most Australian companies found it helped in raising equity. One drawback, however, is that international investors aren’t entitled to the same tax credit. As a result, they may be less likely to invest in the Australian market.
It’s this last point that has partly brought it back onto the discussion board.
There are a range of other reasons for this coming on to the agenda now. First, the Financial Services Inquiry (chaired by David Murray) which reported last December, made the point that there were less ‘clear’ reasons for continuing with imputation. But it didn’t go as far as recommending any changes.
The March release of the Tax Discussion paper also highlighted some of the limitations of imputation. But, again, it didn’t come up with any direct recommendations for change.
There is a very big debate that Australia will need to have at some point about how we go about taxation. Much of the burden currently rests with individuals and companies, something many see as unsustainable. You’ve probably read more than you care to about the cost of an ever larger older population. But future governments will have to work out how to pay for this without going down the path of bigger deficits.
For Australia to remain competitive, the government believes that they (or a future government) will need to lower the corporate tax rate. If they don’t, companies will simply choose to set up in countries with a lower rate. And this raises the issue of where they will find the funds to cover the potential shortfall.
It seems unlikely that there will be any changes in the treatment of imputation in this Budget. The government must know how deeply unpopular any amendment would be. If there is to be change in the future, it will no doubt be part of the process of a much bigger debate on the future of taxation as a whole.
One thing I’ll do with my income investment newsletter, Total Income, is to watch closely and try and anticipate any changes in government policy to help you be prepared.
How’s the market looking?
Here’s a chart from Tuesday.
You can see that the market rallied almost 70 points from the open and stayed there for most of the day before selling off aggressively at 2:30pm after the RBA announced their decision to leave rates unchanged.
Source: Google Finance
Click to enlarge
It shows you how much expectation the market built in for a rate change. Now there will be even more expectation of a cut next month.
While a rate cut might have given the market a further boost, any sell off gives us the opportunity to try and get our hands on some high yielding stocks at a better price. So we’ll be vigilant in our search for the best opportunities.
However you feel about the RBA and the Treasury’s influence on markets, you can’t afford to ignore it. Investors searching for income in this low interest rate environment have to understand what the government’s next move could be and how it could affect their investments. This is why I make it one of my focusses at Total Income.
Editor, Total Income
Editor’s Note: This article originally appeared in Money Morning.