Dividend Imputation Research Articles

Corporate payouts in Australia

Kahle and Stulz (2021) find that inflation-adjusted corporate payouts (dividends and repurchases) in the US are three times larger over the period 2000–2019 (post-2000) compared to the 1971–1999 period (pre-2000), and that the growth in the payouts comes from repurchases instead of dividends. We investigate the corporate payouts in Australian equity markets with a dividend imputation system and find that the payouts increase by almost 80% from the pre-2000s to the 2000s. Unlike in the US, the payout increase is largely driven by dividends instead of share repurchases in Australia. Similar to the US, Australian top payers have also become bigger, older, more profitable, and have more free cash flow in the 2000s than before. Moreover, top Australian payers pay out more of their free cash flow, since they spend less on capital expenditures.

Dividend imputation taxes and the curious case of a price premium between BHP and Billiton American depositary receipts

AbstractBHP Group was formed in 2001 when the Broken Hill Proprietary Company Limited in Australia merged with the Anglo–Dutch Billiton Plc in the UK to form a dual−listed company. The American Depositary Receipts (ADRs) for BHP and Billiton trade on the NYSE, and despite these two securities having exactly the same voting rights and US dollar denominated dividends, the BHP ADR generally sells at a premium to the Billiton ADR, though that premium has considerable time−series variation. We investigate whether differences in the imputation tax systems that apply to dividends in Australia and the UK help explain the time series variation in the premium of the ADR prices. Our results confirm that imputation tax differences are a significant determinant of the premium. Our paper hence provides direct evidence that imputation tax credits are capitalised into equity prices.

1985 reform of the Australian tax system

After the tumult of the Whitlam government, the Fraser government (1975-1983) saw consolidation with less reform. The 1975 Asprey report remained largely unactioned, despite the fundamental problems that burdened the Australian tax system. The 1983 election of the Hawke government, however, set in train a series of economic reforms, and tax would play a big part in these. This paper tracks those developments, starting with the tax avoidance and evasion issues that plagued the era and the 1981 Campbell Committee financial system review. The main focus, though, is on the 1985 draft white paper and tax summit that delivered the first instalment of the Asprey blueprint. While the broad-based consumption tax didn’t get up, the package reformed Australia’s income tax system, with a capital gains tax, a fringe benefits tax, a foreign tax credit system and a dividend imputation system.

Post-War Tax Reviews and the Asprey Blueprint

After World War II, international attention turned to economic reconstruction and the transition back to peace-time. As Australia settled into the 1950s and 1960s ‘golden years’ there wasn’t an obvious imperative to tackle basic economic reform and tax design issues. Underlying structural problems were building, though, that would ultimately call for an economic reform agenda and tax would be part of that. This paper tracks these developments, looking at some limited tax reviews along the way but the main focus will be on the 1975 Asprey review which provided a blueprint for reform of the Australian tax system. Its recommendations for a capital gains tax, a fringe benefits tax, a foreign tax credit system, dividend imputation and a value added tax would take 25 years to implement.

The potential effect of taxes on the equity home bias in New Zealand PIEs

This paper examines the effect of taxes on the international diversification benefits available to New Zealand investors who invest in equities held through a portfolio investment entity (PIE). Historical monthly index data for 34 markets denominated in New Zealand dollars from 1993 to 2018 is used with an in-sample mean-variance optimization approach to estimate the optimal domestic asset allocation and potential benefits of international diversification. Our findings suggest that New Zealand's dividend imputation tax regime and differential taxation rates on domestic and offshore investment can account for a 7%–11% weight shift towards the New Zealand domestic market compared to the case of no taxes. Monte-Carlo simulation analysis using different return patterns also provide support for home bias in the presence of higher taxes on offshore equity investment. Overall, our results provide a partial explanation for current investor home bias in New Zealand. In contrast, without dividend imputation and differential rates, taxes would suggest a weight shift to offshore equities of between 1% and 6% due to high dividend yields in the New Zealand market.

Corporate payout policy: does product market competition matter? Evidence from Australia

PurposeThe purpose of this paper is to examine the impact of product market competition on dividend payout and share repurchases in Australia in which a full dividend imputation system has been in place since 1987.Design/methodology/approachPanel data estimation with industry and year-fixed effects is employed to examine the role of industry competition on dividend payout and share repurchases. The paper uses a sample of ASX200 non-financial firms, including 4,272 observations over the period 1992–2015. To address the endogeneity problem, the authors utilize the event of Australia–United States Free Trade Agreement (AUSFTA), which became effective on 01 January 2005, and perform a difference-in-difference analysis.FindingsThe authors find that firms operating in competitive markets are likely to pay more dividends and repurchase more shares to reduce agency costs. The positive relation between industry competition and dividends is stronger among firms where the CEO and the Chairman of the Board are the same person and among firms with higher market-to-book ratio and higher standard deviation of stock returns. The study results are robust when the authors account for the impact of franking credit on dividend payment. In the difference-in-difference analysis, the authors find strong evidence of a casual relation that product competition drives changes in dividend policy.Practical implicationsThe findings are consistent with the notion that intense product market competition can mitigate agency conflicts between managers and shareholders and with the information signalling explanation of market competition. As such, regulators may want to introduce policies that encourage more market competition (e.g. market deregulation) to enhance market efficiency.Originality/valueThis study incorporates product market competition in explaining the firm payout policy.

Constitutional Recognition: reflecting on the prospect and direction in the 46th Parliament

In an election campaign that spent much time around esoteric ideas like dividend imputation credits and electric vehicle targets, it is strange that little time was spent discussing Labor's proposal to enshrine a Voice to Parliament for First Nations people in the constitution, via referendum. Unlike nations such as New Zealand or Norway, Australia lacks a specified mechanism for First Peoples’ political representation. As with our decades of inaction on constitutional recognition of Australia's Indigenous peoples, this can also be seen manifesting in our inability to improve educational, health, and justice outcomes for Indigenous Australia. Individuals like newly appointed Minister for Indigenous Affairs, Ken Wyatt, and Member for Barton, Linda Burney, can and do break through this glass ceiling. But such examples serve as outliers rather than the norm, as Indigenous Land Rights leader Galarrwuy Yunipingu noted, ‘I have had a place at the table of the best and the brightest in the Australian nation - and at times success has seemed so close, yet it always slips away’ (Yunipingu 2008, para. 20). The Uluru Statement from the Heart sought to show a path forward from the ‘torment of our powerlessness’ and for ‘reforms to empower our people and take a rightful place in our own country’.

Sampling Error and the Joint Estimation of Imputation Credit Value and Cash Dividend Value

Since dividend imputation was introduced to Australia 32 years ago, researchers and corporate finance practitioners have debated the extent to which imputation credits are incorporated into share prices. One reason for divergence of opinions is the selective interpretation of coefficient estimates from regression. Sample observations exhibit little dispersion of corporate tax rates and franking percentages. This means that if noise in a sample leads to the value of cash being understated, the same noise is likely to lead to the value of credits being overstated. Using simulation analysis we show that there is an inverse relationship between estimates of credit value and cash value due to random variation in samples. This problem is exacerbated by a lack of independence across observations. Regression analysis has merit, provided inference accounts for the inverse relationship between estimates of cash dividend value and imputation credit value. We consider five studies which reported estimates of 0.34 to 0.57 for imputation credit value and 0.73 to 0.88 for cash dividend value. The implication of our simulation analysis is that it would be incorrect to claim that cash is fully valued, but that imputation credit value lies within the range of 0.34 to 0.57. This would represent selective interpretation. A researcher cannot claim to have a reliable sample and research method which allows interpretation of one coefficient, but at the same time ignore the implications of other coefficients from the same sample and research method. The evidence suggests that, if cash is in fact fully valued by the market, then sampling error leads to the coefficient on cash (0.73 to 0.88) being understated and therefore the coefficient on credits (0.34 to 0.57) being overstated.

What Dividend Imputation Means for Retirement Savers

We examine the implications for Australian retirees of full access to dividend imputation credits using a stochastic life‐cycle model. We find that the availability of imputation credits can justify a significant bias towards Australian equities in retirement portfolios, largely at the expense of world equities. We also generate estimates of the value of imputation credits to retirees, finding it could potentially support increased consumption during retirement of 5–6 per cent, or equivalent value to a 8–9 per cent higher balance at retirement. Our study enhances the understanding of equity home bias, and provides insights relevant for public policy.

What Dividend Imputation Means for Retirement Savers

We examine the implications for Australian retirees of full access to dividend imputation credits using a stochastic life‐cycle model. We find that the availability of imputation credits can justify a significant bias towards Australian equities in retirement portfolios, largely at the expense of world equities. We also generate estimates of the value of imputation credits to retirees, finding it could potentially support increased consumption during retirement of 5–6 per cent, or equivalent value to a 8–9 per cent higher balance at retirement. Our study enhances the understanding of equity home bias, and provides insights relevant for public policy.

Australia's High Company Tax Rate and Dividend Imputation: A Poor Recipe for a Small Open Economy?

By international standards, Australia’s business tax system combines a high company tax rate of 30 per cent with low taxation of domestic investors through dividend imputation. This prioritizing of domestic investors over foreign investors is at odds with the evidence in this paper that the marginal investor is foreign. Better aligning Australia’s business tax system with international practice would encourage business investment, reduce tax avoidance and reduce the riskiness of national income. This paper assesses the evidence on the size of these three effects and models the consumer benefits of better aligning the Australian business tax system with international practice.

Australia's Company Tax: Options for Fiscally Sustainable Reform, Updated Post Trump

The Australian Government proposes to reduce the company tax rate from 30 to 25 per cent. However, there are widespread concerns that the fiscal cost is not affordable. This paper considers alternative reforms of corporate taxation that could fund a corporate tax rate cut. We address key non-neutralities in the corporate tax system and consider key international developments, including the enactment of the Trump tax plan in the United States, which lowers the US corporate tax rate to 21%. We examine the case for abolition of dividend imputation in favour of a lower headline company tax rate and consider the spectrum of reform options for the corporate tax base, which ranges from the cash flow tax and allowance for corporate equity or capital to a comprehensive business income tax which would eliminate interest deductibility. These measures (which could co-exist in a hybrid system) might be accompanied by discounts on dividend and interest income at the personal level, in replacement of dividend imputation.

Modelling Australian Corporate Tax Reforms: Updated for the Recent US Corporate Tax Changes

As a small open economy, Australia can expect that foreign investors will add our corporate tax burden to the hurdle rate of return that they require to invest here, rather than absorb it. This discourages foreign investment and leaves local labour to bear the final burden of local corporate tax, discouraging labour supply. This double disincentive effect led Gordon to recommend against applying corporate tax in a small open economy. More recently, Auerbach, Devereux, Keen and Vella have argued that international profit shifting has added to the case against corporate tax in its current form. Australia further undermines the efficiency of corporate tax as a revenue raiser by returning a substantial portion of the revenue through a dividend imputation system that Fuest and Huber show is undesirable for small open economies. At the same time, Boadway and Bruce showed that corporate tax can be efficiently applied to the returns from immobile assets such as land, minerals and local market power, leading to calls to narrow the corporate tax base to only capture such economic rents. Using economy-wide modelling, this paper quantifies the substantial consumer benefits from tax reforms that reduce the corporate tax rate, narrow the base to economic rents, or replace imputation with less generous dividend tax concessions. The already substantial benefits of these business tax reforms have increased as a result of the US business tax changes under the recently-passed 2017 Tax Cuts and Jobs Act.

The impact of dividend imputation on corporate tax avoidance: The case of shareholder value

The objective of this paper is to evaluate whether dividend imputation, whereby tax credits may be passed on to shareholders for corporate tax paid, impacts corporate tax avoidance. This is undertaken with a pooled cross-sectional research design evaluating differences in tax avoidance across firms where there are significant differences in corporate tax avoidance incentives. Specifically, potential differences arise between firms paying dividends with tax credits, paying dividends without tax credits, and not paying dividends. Results suggest that firms paying dividends with tax credits attached are less likely to engage in tax avoidance with an average cash effective tax rate up to 16.9 percentage points higher than firms that pay dividends without tax credits, and up to 14.7 percentage points higher than firms that do not pay dividends at all. Accordingly, this provides insights into the effectiveness of dividend imputation in mitigating corporate tax avoidance, as well as providing support for the continuance of dividend imputation in Australia. Additionally, a positive association is found to exist between outside directors and corporate tax avoidance, extending to firms paying dividends with tax credits where dividend imputation is expected to mitigate such a relation. In combination, these results suggest heterogeneity of costs and benefits of tax avoidance and this is a challenge in evaluating corporate tax aggressiveness generally, and the impact of corporate governance on corporate tax avoidance in particular.

Dividend drop-off estimates of the value of dividend imputation tax credits

The value of dividend imputation tax credits is the product of two components: the proportion of credits that are distributed to shareholders and the market value of those distributed credits. We employ a large sample and improved econometric techniques to estimate the value of both cash dividends and distributed imputation credits using dividend drop-off analysis. Our sample period begins in July 2000 to coincide with an important amendment to the dividend imputation legislation that allows residents to claim a cash rebate for excess credits, ends in June 2016, and covers 4690 ex-dividend events. Our results indicate that the market values distributed imputation credits at approximately 35% of the face amount.

The Market Value of Dividend Imputation Credits Implied by Futures Prices

A limitation of prior research on imputation credit value is researchers’ selective interpretation of the regression coefficient used to estimate credit value. This ignores the in-sample evidence on the value of cash dividends and the value of a fully-franked dividend. This is a problem because a sample of security prices, unfranked dividends and franked dividends necessarily leads to the simultaneous estimation of the value of a cash dividend and an imputation credit. We measure the value of imputation credits under three tax regimes, accounting for the joint estimation of the value of cash and credits. The practical implication is that in the cash rebate regime, the market value of imputation credits lies within the range of -0.12 to 0.17. A dollar of cash is valued by the market at somewhere between 88 cents and 98 cents. At the lower end of the cash value (0.88), credits are worth between 0.04 and 0.17; and at the higher end of cash value (0.98), credits are worth between -0.12. and 0.00. The value of imputation credits has, in our view, moved over time in a direction consistent with changing tax treatment. But it is plausible that the value of imputation credits has remained within the range of -0.04 to 0.06 across all three tax regimes.

What Future for the Corporation Tax?

Corporation taxes are under pressure from a number of sources. This paper looks at the arguments for and against corporation tax in the context of Australia, which has had for 30 years a dividend imputation system for corporate-shareholder taxation. Corporation tax is estimated to have a high economic cost relative to the revenue raised; there are worries about base erosion and profit shifting (BEPS); and there are suggestions that dividend imputation should be abolished to allow a lower corporate tax rate. The imputation system and discount for capital gains tax largely eliminates the corporation tax for Australian domestic investors, so that the effective tax on domestic corporate investment is indicated by personal income and capital gains taxes. Hence the Australian corporation tax is mainly a tax on foreign investment. In an era of mobile international capital this role is increasingly problematic. In the long run, the corporation tax may wither away due to international tax competition and BEPS. This may be an acceptable development provided that, as this happens, we put in place a stronger system of personal taxation of capital incomes, with international co-operation in the discovery and valuation of such incomes. We can also rely on consumption tax, such as the Goods and Services Tax (GST), or a business cash flow tax, to tax part of corporate sector economic rents.

Foreign portfolio equity holdings and capital gains taxation

Using panel data from 23 developed countries over the 2001–2011 period and employing the Arellano-Bover/Blundell-Bond dynamic panel estimation technique, this paper shows that the source country capital gains tax has a negative and statistically significant impact on foreign portfolio equity holdings. On average, a 1 percentage point increase in capital gains tax rate leads to 0.018% decrease in foreign equity holdings. The negative relationship between the capital gains tax and foreign equity holdings is found to be robust to alternative measures of the source country capital gains tax, inclusion of the dividend imputation tax rate, foreign dividend tax withheld rate, dividend tax credit and other control variables (the source and host country financial wealth, trade, exchange rate volatility, foreign listing and institutional quality). We find that a 1% increase in financial wealth of the source (host) country leads to, on average, a 0.428% (0.427%) increase in foreign equity holdings. An improvement in institutional quality has a positive effect on foreign equity holdings but an increase in the exchange rate volatility has the opposite effect.

Imputation tax system, dividend payout, and investor behavior: Evidence from the Taiwan stock exchange

Abstract This paper examines the change in corporate dividend policy and investor behavior in relation to the introduction of the imputation tax system in Taiwan. However, the findings of this study are unlike those of previous studies. Stock dividends are treated as a dividend for taxation purposes and represented the dominant payment mechanism in Taiwan before 1997. By contrast, both the number of firms paying cash dividends and aggregate cash dividend payments increase after the introduction of the imputation tax system. Consistent with the tax preference for the distribution of dividends, a higher level of tax deductible rate was associated with a higher cash dividend payout ratio. Domestic individual investors have been the only shareholders affected by the introduced dividend imputation, whereas the percentage of firms owned by domestic individual investors has decreased. However, the percentage of firms owned by foreign institutional investors has increased.

Dividend imputation or low company tax

Recent OECD data offer limited support for the proposition that our company tax rate could be cut substantially with little or no loss of tax revenue. Treasury‐type analysis suggests otherwise: our headline rate could be cut to 20 per cent if abolishing dividend imputation were used to finance a cut in the headline rate. But this type of exercise relies on strong assumptions, and imputation mitigates other idiosyncrasies of our tax system. Accordingly, abolition of imputation should await a cut in our top marginal personal rate along with a transition to back‐end taxation of most superannuation accounts.