The Labor Government is proposing to eliminate cash refunds received from excess dividend imputation credits - a "generous" tax loophole that's mostly benefiting self-managed super funds.
Shadow treasurer Chris Bowen said this "unfair revenue leakage" puts a greater tax burden on low and middle income earners, but enables SMSFs to significantly benefit.
Two-thirds of refunds accrue to tax-free superannuation and about 90% of these end up with SMSFs, Bowen said in an ABC interview.
More than half of cash refunds go to SMSFs with balances greater than $2.5 million, and 82% goes to balances of over $1 million, he said.
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"I fully expect self-managed super, in particular, to be unhappy about this. Some people have managed their affairs to maximise their refunds. I accept that. But what we're doing is giving plenty of notice that an incoming Shorten Labor Government will reform this system," Bowen said.
Shutting down the concession will save the budget $11.4 billion next financial year and $59 billion over the medium term, he added.
The dividend imputation system, introduced by Paul Keating in 1987, eliminates the double taxation of dividends on two levels: The tax companies pay on profits that are then distributed to shareholders who pay personal income tax on dividends.
At the time Keating explicitly stated that: "[imputation] credits will not give rise to cash refunds where it exceeds tax otherwise payable."
Under the Howard Government in 2000, individuals and superannuation funds were able to claim cash refunds for excess imputation credits that were not used to offset tax liabilities. This meant that if an imputation credit was greater than the tax liability, investors would receive a cheque at tax time.
The purpose of dividend imputation was to reduce tax paid, and now individuals - many wealthy individuals - were getting a cash bonus, Labor said.
Australia incidentally is the only OECD country with a fully refundable dividend imputation credit system - a concession which has grown at a rapid rate and now costs the budget more than $5 billion dollars a year, Bowen said.
The policy, which is part of Labor's tax reforms targeting negative gearing and capital gains, and closing discretionary trusts loopholes, would apply from 1 July 2019 if Labor wins the election.