Proposed Australian tax reform could shift demand to bonds

Sydney

AUSTRALIA has launched a debate on tax reforms that could have the unintended effect of slashing demand for domestic equities in favour of bonds.

The government's Re:think discussion paper suggests Australia has the scope to increase its aggregate tax burden from 27 per cent of GDP, one of the lowest in the developed world, and questions the dividend imputation system, established in 1987, that gives refunds of almost A$30 billion (S$31 billion) a year to shareholders.

Under imputation, company tax acts as a withholding tax on Australian shareholders in collecting some of the tax shareholders would pay when they receive dividends.

Local shareholders then receive a franking credit against their tax liabilities for the tax the company paid. Individuals, superannuation funds and charities are refunded any excess tax paid at the company level to the tune of around A$19 billion annually, with Australian companie…