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Chapter 15: A fairer and more consistent treatment of entity distributions

A case for reform

The current imputation system is complex and may produce unfair results and distortions:

  • the distinction between franked and unfranked dividends is complex and allows dividend streaming;
  • low marginal rate shareholders are disadvantaged; and
  • the s46 rebate creates unintended loopholes, including:
    • indefinite preservation of tax preferences between entities, even if unrelated;
    • distortions associated with loss deductions and capital gains tax (e.g. loss cascading); and
    • the need for specific anti-avoidance rules to deal with the distortions.
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A strategy for reform

To apply to entities a redesigned imputation system delivering improved integrity, greater fairness and reduced complexity by:

Introducing full franking of all distributions or otherwise improving integrity through the entity chain

Refunding excess imputation credits

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Key policy issues What are the options for achieving integrity through the entity chain while recognising the impact on foreign investors? How might the potential for double taxation of distributed tax-preferred income be addressed? Who would have excess imputation credits refunded? When and how might excess imputation credits be refunded?
Reform options Option 1
Impose a deferred company tax.

Option 2
Apply a resident dividend withholding tax (RDWT).

Option 3
Tax unfranked inter-entity distributions.

Option 1
Refund franking account surpluses on liquidation.

Option 2
Allow the double tax to be creditable against future company tax liability.

Option 3
Allow prepayment of tax on temporary tax preferences.

Option 4
Adjust the cost base of the 'funding' asset upon distribution from unrealised gains.

Resident individual taxpayers and complying superannuation funds would be eligible for refunds. Registered charities would also
be eligible to some extent.
Option 1
Provide a refund at the entity level
at the time of distribution.

Option 2
Provide a refund to the investor
by instalments during the year.