To help prove we are not attempting to sway our Clients one way or the other in the coming Federal Election, as a counter to our last post we now focus on a recent announcement from the Opposition Leader, Tony Abbott.
Mr Abbott and the Liberal Party have announced that if they are elected, they will cut the Company tax rate from 30% to 28.5%.  However, for large companies, they will have an additional, separately managed “levy” imposed on their profits equal to 1.5%, effectively negating the tax cut and putting them back paying 30% to the tax man (the levy is to be used to fund the proposed paid parental leave scheme).  You can read about the announcement here.
There are many arguments each way for whether corporate taxes should be increased or whether they should be reduced, it is not our intention to get into this very difficult, and largely unresolvable debate.
However what is much harder to argue against is the premise that a simpler tax system is a better tax system.  Anything that adds an extra level of complexity is just a bad idea.  It decreases understanding amongst the public, increases the cost of compliance for the taxpayers affected (read reduced dividends for shareholders, most of whom are individual Australians via their super), and most importantly (though most overlooked) it increases the cost of administering the tax system (meaning an even more expensive to run ATO).
Unfortunately this bad idea goes a step further …
Currently, when a company pays tax, the credit for that tax is passed onto the shareholders along with their dividend.  The credit reduces the tax the shareholder pays on their income, and in many cases (ie. in Self-Managed Super Funds) the tax paid by the company is refunded to the shareholder because their tax rate is less than that of the company’s.  The system is called “Imputation” and it ensures there is no double taxation of profits.
However Mr Abbott has announced his “levy” for large companies will not be included in the Imputation system.  So the shareholder will not receive a credit for this extra tax paid by the company.  The result is double taxation, increased confusion and increased compliance costs.
Again we are sorry to say it, but there must be better ways to fund proposed new schemes, because this is a bad idea!