Dividend Imputation System and its Impact on Corporate Taxation in Australia

Running head: TAXATION LAW
TAXATION
Name of the Student
Name of the University
Author Note

1TAXATION LAW
Table of Contents
PART A...........................................................................................................................................2
PART B...........................................................................................................................................5
PART C...........................................................................................................................................7
Question 1....................................................................................................................................7
Question 2....................................................................................................................................8
Question 3....................................................................................................................................8
Question 4....................................................................................................................................9
Question 5....................................................................................................................................9
Reference:......................................................................................................................................10

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PART A
The present subject matter of the case is based on the provision of existing system
regarding dividends imputation and reasons for its introduction. After the implementation of
dividend imputation, certain objections have been introduced by the labor organizations. They
have raised their voice to make certain reforms regarding the process1. All the relevant
suggestions have been characterized in this case. Further, certain legislative provisions have been
mentioned in this report where the matter related to the dividend policies have been included.
Considering the facts of the given application, the matter is dealing with corporate tax.
According to the historical perspective of corporate taxation, after tax dividends are regarded as
double taxation. In this dividend system, the shareholders of a company have an option to be
taxed for second times. A classical system of tax is required to be maintained and in this process,
the shareholders are making certain investments in a company and the return get from such
investments could not be treated as dividends. Considering the rule, certain facts have come into
the light. Dividends imputation helps to eliminate the tax disadvantages and stop the process of
distribution of dividends among the shareholders by requiring them to pay their respective
marginal rate. In Australia, dividends imputation system can be observed. According to
Australian Taxation Office Guide, The Australian tax system allows companies to determine the
proportion of franking credits to attach to the dividends paid. A franking credit is a nominal unit
of tax paid by companies using dividend imputation. Franking credits are passed on
to shareholders along with dividends. The process of dividend imputation system has been
introduced in the year 1987 by Hawke-Keating labor government. The reason for the
introduction of the dividend imputation is that on early stages, a company had to pay company
1 "Imputation". in , , 2018, <https://www.ato.gov.au/Business/Imputation/> [accessed 25 May 2018].

3TAXATION LAW
tax on all the profits gained by it. Then it had to pay dividends to the shareholders and the
dividend was also taxed for the second time in the form of double taxation. When a shareholder
gets franking credit, he may get an option of refund. Considering the importance of the franking
credits or franking dividends, it can be regarded as tax effective form of income. As a simple
explanation, for an amount of profit denoted P, the company deriving that profit needs to pay tax
at corporate tax rate RC (say, 30%). When the after‐tax profit gets distributed to a domestic
individual shareholder whose marginal tax rate is RI (45% for example), under a full imputation
system that shareholder is only required to pay the differential in tax, which is P*(RI ‐ RC)
where RI ‐ RC = 15%. The question arises here is, what will happen when a country changes its
statutory company tax rate? Further, it has been observed that in a globalised milieu where
countries are in antagonism of lowering commercial tax rates to attract overseas investments,
most governments bear the pressure to follow their peers and to be in line with other tax
jurisdictions. As a result, in a fiscal year where RC reduces, say from 30% down to 20%, the tax
rate differential (RI ‐ RC) is increased by 10% (i.e. from 15% to 25%) in this simple
demonstration. What it means is that, if a company paid tax at 30% on its business profit in a
prior year but the underlying after‐tax profit is later on distributed in the form of franked
dividend based on an imputation rate of 1 See Geoffrey Kingston, ‘Dividend Imputation or Low
Company Tax?’ (2015) 2 JASSA FINSIA’s Journal of Applied Finance 12. This paper examines
the potential for a company tax cut in Australia should the dividend imputation system be
abolished. 2 David Richardson, ‘The Case against Cutting the Corporate Tax Rate’ (Technical
Brief No 20, The Australia Institute, December 2012). 3 Andrew Ainsworth, ‘Dividend
Imputation: The International Experience’ (2016) 1 JASSA FINSIA’s Journal of Applied
Finance 58. 2016 JOURNAL OF AUSTRALIAN TAX 2016 VOLUME 18 45 20%, the