Australia's Future Tax System

Final Report: Detailed Analysis

Chapter B: Investment and entity taxation

B2. The treatment of business entities and their owners

Key points

In Australia, partnerships and, to a significant degree, trusts are taxed on a flow-through basis. While this remains broadly appropriate, the general trust tax rules are complex and give rise to uncertainty. Accordingly, those rules should be rewritten and updated.

Companies are taxed as separate entities from their shareholders, but the imputation system avoids the double taxation of corporate profits. As dividend imputation still provides a number of benefits, including improved neutrality around financing and entity choices, and also has integrity benefits, it should be retained in the short to medium term.

The benefits of dividend imputation will, however, decline as Australia becomes more integrated into the global economy. Therefore, for the longer term, consideration should be given to alternatives to imputation as part of a broad reconsideration of company income tax arrangements.

To preserve the integrity benefits and integration outcomes of dividend imputation, imputation credits should continue to be provided only for Australian company income tax paid. Likewise, dividend streaming and franking credit trading practices should, in general, continue to be prohibited.

As part of closer economic relations between Australia and New Zealand, consideration could be given to the appropriate degree of harmonisation of business income tax arrangements between the two countries. Bilateral mutual recognition of imputation credits would be one element of this broad examination.