Corporate Financial Policy Biases and the Ralph Reforms

Abstract

Australia's recent Review of Business Taxation chaired by Mr John Ralph listed the neutrality of taxes on an entity's ®nancing and distribution decisions as a goal when redesigning entity taxation. In response to the Review the government has agreed to a number of reforms to the taxation of companies and their shareholders. This paper quanti®es the ®nancial biases that are created by the Australian company tax system for widely-held companies owned by Australian residents. It also examines how these have been affected by the recent reforms.

A Measure of the Efficacy of the Australian Imputation Tax System*

“…3 See Australian Financial System Inquiry (1981), Cheok (1981), Review of Business Taxation (1999a,b) and Department of the Treasury, Australian Government (2002). 4 For a discussion of various tax-induced biases that exist under the Australian imputation tax system, see, for example, Officer (1981), Finn (1981), Howard and Brown (1992), Benge (1997Benge ( , 1998Benge ( , 2001 and Review of Business Taxation (1999a). 5 In considering the effect of Australian taxes, including DWT, on the final after-tax return to nonresident investors, the Review of Business Taxation (1998, p. 176) suggests 'it is notoriously difficult to determine the true value to non-residents of credits which may be available to them in their home jurisdictions for taxes ... paid in Australia'.…”

“…We note the limitation expressed by the Australian Bureau of Statistics, that it is inherently difficult to estimate the precise nature of non-resident equity investment in Australia because 'where nominees are involved, the issuer generally does not know who holds the share'. © 2008 The Economic Society of Australia T able 3 Aggregate Dividends Received by Resident and Non-resident Investors Franked dividends 1988198919901991199319941995199619971999200020012002 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Mean 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 used 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Mean 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 19881989199019911993199419951996199719992000200120022004Mean 1990-2000Mean 2001-2004Mean 1990-2004 In summary, there has been a significant elimination of double taxation of dividends since 1990 for resident shareholders in Australian firms but not for foreign shareholders. We note that from a policy perspective, a 100 per cent utilisation value of credits is not necessarily desirable.…”

“…4 4 For a discussion of various tax‐induced biases that exist under the Australian imputation tax system, see, for example, Officer (1981), Finn (1981), Howard and Brown (1992), Benge (1997, 1998, 2001) and Review of Business Taxation (1999a). …”