In case you hadn’t noticed, it’s the start of a new season. And I’m not talking about football or rugby. It’s the Australian ‘Budget’ season, and the countdown to May is ticking. The Treasurer will deliver his second budget on May 12th. I can’t remember such a highly anticipated Budget season.
Until then, we’ll hear the typical speculation about the size of the deficit and the potential for any ‘big ticket’ reforms.
All this will be set against the backdrop of the lobby groups competing for airtime to get their agendas implemented. Sometimes it seems to me that these groups have a lot more sway than the humble voter!
I know that it’s easy to get a bit cynical with all the politicking that will go on. So rather than give you some commentary on that side of things, I thought I’d focus instead on two potential areas of reform.
They’ve been in the press lately, and both could have a direct impact on savers and investors who rely on dividends for income.
The money was to go into something called the Financial Stability Fund, which the Treasurer described as ‘quarantined’ from the rest of the budget.
Quite how it was going to be ‘quarantined’ was unclear, because the money raised by this levy would be treated as revenue in the Budget. I’m not an accountant, but that seemed a bit unusual to me.
Another issue arose about when to apply the levy. A typical practice might have been to impose a levy ‘after’ a collapse. Under this proposal, however, depositors would pay the levy ‘before’ a collapse. That is, in the unlikely event that one was to occur.
And it seems that this levy is now back on the table. It’s always hard to predict which way these things are going to go. But for what it’s worth, when asked, no one in the government seems to be denying it. The belief is that it will be very similar to the Labour proposal.
The original plan was to levy the banks directly. But both then and now, the ABA (Australian Bankers’ Association) have been clear who will pay. And that will be the depositor.
The ABA also believe the levy has the potential to raise their cost of funding. As the banks rely on low-cost deposits for a portion of their funding, they think that this pool of funds will decrease as savers take their money out and put it into higher yielding investments. In effect, they will need to pay a higher margin to get their funding elsewhere.
You might remember when the states levied a BAD (Bank Account Debits tax) on withdrawals, and a FID (Financial Institutions Duty) on deposits. However, the states agreed to abolish these as part of the introduction of the GST.
The merits or otherwise of the levy aside, there is not much we can do if they decide to reintroduce a bank deposit tax. No doubt we will find out on Budget night, or prior, as some have predicted. All we can do is assess any changes and adjust our investment decisions accordingly.
While Murray’s report stated that there was perhaps less ‘clear’ reasons now to keep imputation, it didn’t go as far as to recommend any immediate changes. And similarly with the tax discussion paper, it raised both the benefits and some of the limitations of the current system without directly recommending any major changes.
Implemented in 1987, the reasoning for imputation was to avoid the double taxation of income. Prior to this, a company would pay tax on its earnings and then distribute dividends to their shareholders, who would also need to pay tax on this income.
It also acted as an incentive for Australians to invest in locally based companies.
It’s probably unlikely that any changes will be included in the upcoming budget. I do think, however, that it’s important to look at this issue as part of the broader challenges facing this and future governments.
That challenge is how they are going to match taxation revenue against the ever increasing expenses of a population that’s going to live longer. The imputation system is just one part of the bigger picture of taxation reform.
The government believes that it will need to reduce the company tax rate at some point in the future if we are to remain internationally competitive. A lower company tax rate should attract more investment, but it will also lower the imputation (or franking credits) available to investors.
Later this year, they will release a second paper with a range of different taxation options which they plan to take to the next election. One thing is clear, any changes to imputation will directly affect the financial position of literally millions of shareholders. I just wonder if any government is brave enough to try.
Editor, Total Income