Labor's plan to close a tax loophole

FEDERAL LABOR'S PLAN TO CLOSE A TAX LOOPHOLE

HOW IT WORKS RIGHT NOW

* A company earns $100, pays $30 in tax, and pays $70 to shareholders.

* To ensure that profit isn't taxed twice - once with corporate tax and again on income tax - shareholders get a $30 tax imputation to go with their $70 dividend. This is called dividend imputation.

* Investors can use the imputation to reduce the tax they pay on that dividend.

* But shareholders who pay no tax can also use it to get a cash refund from the government.

* Some investors get $2.5 million in cash from the government each year because they technically pay no tax.

* When John Howard introduced the system in 2000 it cost $550 million a year - now it is above $5 billion a year and growing.

* In 2000/01, the federal budget was billions of dollars in surplus and the economic outlook was strong.

* Today, the budget is in tens of billions of dollar in deficit and the economic outlook is modest, if not still relatively weak.

LABOR'S PLAN

* Shareholders will still get the tax imputation to reduce their tax liability.

* But a federal Labor government will no longer give cash refunds to people whose taxable income is zero.

* No one will pay additional tax, Labor says.

* This will take it back to the original system introduced by Labor's Paul Keating, Labor says.

GOVERNMENT RESPONSE

* Treasurer Scott Morrison says it's "theft".

* Investors will be taxed twice because they will no longer get a cash payment when their taxable income is zero.

* It will hit low-income earners and pensioners with share portfolios.