Offsetting parental leave levy with a company tax cut

Thursday, 22 August 2013  Features

Mothers who give birth after July 2015 will get six months' leave on full pay under Opposition Leader Tony Abbott's paid parental leave scheme, which will cost $5.5 billion a year including superannuation. A senior academic from the Australian School of Business is available to give analysis of who will benefit from the scheme - and who will pay for it.

Professor John Taylor, the head of the School o​f Taxation & Business Law at the Australian School of Business, warns that this is to be funded in part, by a 1.5% additional levy on the approximately 3000 Australian companies with taxable incomes greater than $5 million.

Professor John Taylor said "that does not seem to be a good policy outcome to me. As the additional levy doesn't generate franking credits, domestic shareholders such as superannuation funds and self-funded retirees in larger companies will be worse off. They will be receiving smaller dividends than investors in other companies but will not be receiving larger franking credits. In effect the paid parental leave scheme is to be paid for by some retirees."

However he said the impact on super funds and retirees has been overstated. "For domestic investors in listed companies, cutting the corporate tax rate should produce larger after-tax profits for companies, and hence larger dividends, but at same time will produce smaller franking credits. The end result is that the domestic investor is in much the same position as before. They get a bigger dividend but a smaller franking credit with the result that they pay more tax on the dividend leaving them with the same after-tax dividend as they had previously."

He said foreign portfolio investors in the top 3000 companies will be no better off - indeed "they could actually be worse off on some assumptions." The additional levy offsets the cut in the company tax rate so from the perspective of a foreign portfolio investor "it is just another Australian corporate tax that they can't get any credit for, in their home country," he said. "They may also be liable to withholding tax at rates varying between 15% and 30% on $1.50 of a dividend of $70 that they receive. The withholding tax is something that they currently don't have to pay when an Australian company is distributing dividends funded from profits that have been fully taxed in Australia."

For further comment call Profess​or John Taylor on 02 9385 3292, or Email c.taylor@unsw.edu.au

Media contacts: Julian Lorkin: 02 9385 4704

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