Dividend Imputation Taxation System

Running head: ACCOUNTING AND FINANCE
Accounting and Finance
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1ACCOUNTING AND FINANCE
Dividend Imputation Taxation System
The dividend imputation is the corporate taxation system where the effect of double
taxation has been the primary focus and the way for managing the same. The dividend
imputation policy has been allowed in the year 1987. The concept of dividend imputation
removes the effect of double taxation on the income received by the investors from for the
distributed dividends. The effect of double taxation is seen when both the investors and the
shareholders pay tax on the same income generated by the company. The effect of the double
taxation effect usually inclines the company to prefer debt to equity financing in the capital
structure of the company. However, the Classical taxation system incorporates the effect of the
double taxation by applying the taxation at the company level for the profit generated. The
classical taxation effect takes into account the taxation effect at the company level and at the
shareholders level (Melia, Docherty & Easton, 2016).
The franking credit or the imputation credit work as a type of tax credit being given
which allows the Australian Companies for passing on the tax being paid at level of company to
the shareholders of the company. The franked dividend shows the amount of franked dividend or
the amount of franked credit that has been already paid by the company. Imputation credit is the
common-term used for such franked dividends paid by the company (McClure et al. 2018).
Companies, which usually does not pay any tax on the reported income of the company, attach a
franked credit with the dividend payable by the company. Companies, which have paid tax on
the reported income then the investors, will be receiving a tax rebate on the same. The benefit of
franking credit is that the same will be used for reducing the income tax that will be paid on the
dividends paid (Cannavan & Gray, 2017).