I refer to the article by Nassim Khadem “Investors defend dividend imputation system" (AFR, August 4). This article referred to observations made in the Financial System Inquiry Review Report that “the case for retaining imputation is now less clear than it was in the past".
A number of commentators were cited in the article putting forward their views on various aspects of the system. Regrettably, however, they all seemed to miss the most important point about the dividend imputation system. It was introduced to eliminate the double taxation of company income.
When commentators argue that the system should be dropped or changed, they don’t seem to realise that they are arguing for the reintroduction of the double taxation of company income.
A small worked example shows how dramatic an increase in tax would be felt by investors if the dividend imputation system were to be dropped. Paradoxically the investors with a lower tax rate (for example charities) have the biggest additional tax impost.
Some commentators argue that the dividend imputation system encourages companies to pay out too much of their profit to shareholders. Because franked dividends are so prized by investors, companies need to make a good case to shareholders to reinvest for growth.
However, our experience has been that shareholders are very willing to support boards which have a strong track record of performance and who show that their primary interest is running the companies for the benefit of the shareholders.
The Australian Financial Review