Imputation of Taxation on Dividend Policy

Running head: IMPUTATION OF TAXATION ON DIVIDEND POLICY
Imputation of Taxation on Dividend Policy of Australian Firms Has an Effect on Taxation
Income
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1IMPUTATION OF TAXATION ON DIVIDEND POLICY
Table of Contents
Literature Review................................................................................................................2
Conclusion...........................................................................................................................4
References............................................................................................................................6

2IMPUTATION OF TAXATION ON DIVIDEND POLICY
Literature Review
Taxation as Determinant of Dividend Policy
According to the views presented by Alstadsæter and Jacob (2016) it is gathered that one
of the most effective works on dividend policy was conducted in the “Modigliani and Miller
Model” in which it is argued that company’s investment decision that is its dividend policy is not
relevant to its market valuation. It is also indicated by these reasechers that as per this model the
dividends must not be paid out within a tax regime which segments dividend income and all the
earnings must be retained at the time favorable capital gains takes place. Burkhauser, Hahn and
Wilkins (2015) indicated that differential taxes on the capital gains along with dividends impacts
the existence of individual investors in order to attain income from one form to another. Their
research also revealed that the impact of changes in tax on individual preferences in alignment
with the shift of Australian from a traditional double transaction process to a dividend imputation
technique. In addition, Chang, Chen and Chen (2017) revealed that there is an importance in
wide spreading dividend payments and debate still exist regarding suitable framework of
dividend policy. Certain organizations are also observed to have target payout ratios but does not
consider to change their dividends in case of change in earnings. This is in consideration to the
fact that the shareholders of companies prefer to maintain a steady flow of dividends. Chiu
(2018) stated that there are some factors those determinate target payout ratios in Australia such
as tax policy and cash flow. Cash flow decides the long-term ability of the organizations to pay
dividends and tax regime impacts the shareholders preferences as a form of their returns.
Taxation Imputation on Australian Companies Dividend Policy