Taxation laws : Sample Assignment

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to Task A:.....................................................................................................................2
Introduction:...............................................................................................................................2
Current system of operations of dividend imputation:...............................................................2
Proposal of labour to reform the present system of dividend imputation system:.....................3
Benefits under the present dividend imputation system:...........................................................4
Potential impact on the taxpayers under the current policy of labour:......................................5
Part B:.........................................................................................................................................5
The advantages and the disadvantages of the Labor’s Policy:...................................................5
Attributes of the good tax system:.............................................................................................7
Part C:.........................................................................................................................................8
Answer to question 1:.................................................................................................................8
Answer to question 2:.................................................................................................................9
Answer to question 3:.................................................................................................................9
Answer to question 4:.................................................................................................................9
Answer to question 5:...............................................................................................................10
Conclusion:..............................................................................................................................10
Reference List:.........................................................................................................................12
Appendix:.................................................................................................................................14

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Answer to Task A:
Introduction:
From a very long time the corporate taxation literature has stated its concerns relating
to the system of the double taxation for the organizational profits. This commonly consists of
the dividends that are paid after tax is getting levied is getting levied twice on reaching the
hands of the shareholders (Balachandran et al., 2016). Under the previous taxation system the
returns that were provided to the company shareholders did not represented the returns that
were received by them since at the company level it was already taxed. It is understood that
the shareholders returns were subjected to personal income taxation which is received in the
form of dividend and has eventually contributed to the lower returns for the shareholders. The
traditional taxation system enabled a nation with the chance of lowering the company tax as
they can more competitive in the overseas market in order to make overseas investment in the
multinational firms.
Current system of operations of dividend imputation:
Usually companies that are incorporated are owned by shareholders since they offer
the company with equity shares. Dividends are generally paid by the company in the form of
after tax profits (Melia et al., 2016). The dividends is regarded as the important element of
assessable income for the shareholders. On noting that taxes are imposed on the shareholders
both at the company as well as at the personal level then it results in higher amount of taxes
liability for the shareholders. The profits that are made by the incorporated companies at
taxed at the greater level than the profits at the corporate level. A large number of companies
have made arrangement in order to escape the consequences of double taxation or reduce the
tax liability. This is system is known as dividend imputation in Australia.

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The present system of dividend imputation works by offering the Australian
companies with the capability of issuing the franked dividend to its shareholders. These
dividends are paid from the companies after tax profits that results the shareholders to receive
the after tax dividends and franking credits as well (Balachandran et al., 2017). This
constitutes that the company taxes are already paid on the dividends. The present system of
dividend imputation works by allowing the shareholders with the ability of offsetting the
franking credits against their tax liability or alternatively if the ability is exhausted then the
shareholders can redeem the franking credits in cash at the Australian taxation office.
The current system of dividend imputation works on the values that the return on
equity at the company level income should be received as dividends and should be levied for
taxation purpose together with the alternative source of income under the marginal income
tax rate (McClure et al., 2018). The current system of dividend imputation is applicable on
the Australian resident and only the Australian citizens would be entitled to franking credits.
Additionally the current system of dividend imputation works by only enabling the Australian
companies to offer franking credits for the profits that are made from the Australian
investment.
The present system of dividend imputation mandatorily requires an organization to
maintain the records of franking credit accounts which provide the facilities of monitoring the
payments which is made to the Australian taxation office (Stewart, 2017). Under the present
dividend imputation system organizations are prohibited from franking the dividends higher
than the amount of the company tax rate which is paid.
Proposal of labour to reform the present system of dividend imputation system:
In a declaration made by the labor party there is need for reforming the present system
of dividend imputation. The recent reformation that has been proposed by the labour

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comprises of removing the capability of individuals along with the superannuation funds to
receive the refund of the excessive amount of the franking credits (McClure et al., 2017). The
labor proposes to make non-refundable tax offset for the imputation credits. It is worth
mentioning that these reformation are not to be applied on the charities as well as the non-
profit making organizations.
In a recently launched reformation proposal, the labor have stated their attention in the
direction of the franking credits that does not constitutes tax on wealthy people but tax on
widows. Alternatively, the dividend imputation that circumvents imposing double taxation on
the dividends would continue to operate but the recent proposal of the labor includes
removing the refund of the extra sum of the franking credits (Cannavan & Gray, 2017). The
new proposal that is made by the labour comprises of enabling the super funds as well as the
individuals to claim cash refunds from the extra amount of the imputation credits which is not
employed in setting off the taxes that are levied.
Benefits under the present dividend imputation system:
The current dividend imputation system enables the Australian shareholders or in
other words the domestic shareholders to benefit in a way that they would be to claim the tax
credits that is already paid at the organizational level (Burkhauser et al., 2015). The tax credit
provided to the shareholders assist in lowering down the personal income tax consequences
which the shareholders would have been required to pay on the dividend income. An
important benefit is that the taxes that is paid by the shareholders at the company level
constitutes the top-up amount of the tax after considering the tax which is already paid on the
identical source of income.
This consists of the income that arises from the corporate profits. For instance an
organization that is generating profits at a rate of 30% on company profits (Davis, 2016).

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Additionally, the corporate firms distributes the after tax profits to the domestic level
shareholders under the marginal tax rate of for example 45%. Under the present system of
dividend imputation the shareholders would only be under obligations of paying the
differences in the amount which constitutes 15% (45-30), instead of paying taxes on the
personal amount together with the company tax rate amount.
Potential impact on the taxpayers under the current policy of labour:
In the recent proposal that is made by the labor people that would be impacted are the
self-managed superfunds and the pension funds that has two member holding of lower than
$3.2 million. The full sum of excess franking credits will be lost due to the proposal of the
labor policy. Several concerns have been bought forward that the present proposal made by
the labor would possibly results the Australian to los the franking credits. Additionally the
critics have voiced their opinion regarding the superannuation funds (Balachandran &
Nguyen, 2017). In the recent proposal that is made by the labour for abolishing the refunds of
extra amount of imputation credits would possibly create an impact on the lower income
people that are retired both from inside and outside of the superannuation system. The
proposal of the labor not only impacts the lower income retirees but also the individual
investors as well. This is because the shares held by the investors out of the superfunds would
compromise the principles of neutrality investments.
Part B:
The advantages and the disadvantages of the Labor’s Policy:
Disadvantages of labor’s Policy:
Policies that creates an effect on the retired people are regarded as the bold policy and
possibly consists of the political hazardous move. According to the argument stated (_) the
policy of labour is regarded as the negative gearing and capital gains tax. Amid the several

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problems identified by the Abraham et al., (2015) one of most adverse impact creating policy
is shoving as much as amount of money in the older people budgets that hardly require it. As
a result of this, such measures not only took the money out of the budget but assured the
problems would continue to remain even after the expiry of the government terms. According
to Faccio & Xu, (2015) the policy of the labour promotes economic inequality.
In an argument laid forward by Nguyen, (2016) the policy of labor is criticized for
making the superannuation free of tax for people that are above 60 years old. Consequently
there are numerous people that although above the real income but zero people are below the
taxable income and as a result these people would gain unnecessarily from such policy.
Critics have stated that labors policy suffers from the disadvantage of effecting negatively the
cash refunds for investors are wealthy.
According to Balachandran et al., (2017) the policy of labour possess disadvantage in
creating inequality of income among the people. Labors policy attracts wider criticism for
creating large amount of wealth inequalities and introduces intergenerational disparities. In a
criticism laid down by Chang et al., (2017) the policy of labor is criticized because there are
large number of rich in Australia that holds close to 40% of the nation’s wealth but in the
recent proposal made by the labor would unnecessarily shovel large amount of nations wealth
among those people that are above the age of 55 years. The policies of the labour are
generally directed towards the old age people to garner the large sum of wealth and then
passing on to the later generations.
As stated by Dixon & Nassios, (2016) the proposal of the labour is criticized because
several eligible members of the self-managed superfunds would be forced to lose extra sum
of franking credits. The policy of labor brings forward the questions of fairness in the
economy from the proposal made by the labour regarding the dividend imputation.

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Advantages of labour labor’s policy:
In spite of the above stated disadvantages of the labor’s policy there are certain
policies that also very much advantageous and the same is stated below;
Removal of imputation credits refund: According to McLaren & Cormick, (2018) the
labor’s policy is held advantageous for removing the imputation credits refunds. This
represents that the individual tax payers can use the imputation credits to reduce their liability
to tax however, the excess amount of the imputation credits would not be entitled to refunds.
The labor’s proposal is held advantageous since it would benefit the government in saving a
budgeted $11.4 billion over the period of four years and around $59 billion in the coming
decade.
Australian investment guarantee: The policy of the labor is regarded as advantageous
because it would provide the Australians with the investment to expense around 20% of the
assets that are qualified for depreciation in the first year of investment. According to
Cummings & Wright, (2016) the labors policy is regarded as very much economical. The
policy of labor is incentive oriented and promotes new capital assets investment.
Attributes of the good tax system:
The system of taxation should be such that it fulfils the requirement of the increasing
the activities of the state and attaining the goals of the society that has been placed before it.
The good tax policy should act as the instrument for economic growth (Carling, 2015).
Economic growth is primarily characterized as promoting a higher rate of capital formation.
Given that the strategy for development is assigned with the task of capital formation in the
public then the same should occur at a faster rate. This requires mobilisation of the resources
by the government in order to finance the capital of the public sector. Therefore, the good tax

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system should be such that it enables a nation to mobilise the sufficient amount of resources
for capital formation of economic expansion.
Another attributes of good tax policy is that taxation system should be such that it
helps in promoting equal distribution of wealth and minimize the economic inequalities
(Cormick & McLaren, 2018). The objective of the good tax system in an economy is not just
to increase or generate the revenue for the government but also to make sure that the burden
of taxes should not fall more on those that earn less. Indeed the burden of taxation should fall
more on rich.
Taking into the account the policy of labor an important assertion can be bought
forward that that it contributes to government and public revenue (Carling, 2015). The labor’s
policy possess diversified standards of fiscal adequacy and the policy of labor better meets
the system of elasticity. The policy of labor helps in reducing the excessive amount of
dependence on one single factor and assist in avoiding the adverse impact on the economy. It
can be stated that the policy of labor helps in serving as the tool for economic growth and
promotes capital formation among the people.
Part C:
Answer to question 1:
As evident, the company tax rate for Sigma Pty Ltd stands 30 per cent for the
financial year ended 2015-16. This is due to the fact that the total sum of sales turnover or the
revenue turnover for the company during the year was $12 million which is higher than the
threshold limit of $2 million revenue turnover (Dixon & Nassios, 2016). On the other hand in
the financial year of 2016-17 the company tax rate that would be applied on the Sigma Pty
Ltd is 27.5 per cent and the primary reason for this tax is that the company has recorded the
yearly revenue turnover of $ 9 million which is below the $10 million threshold limit. This

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would result the company from being classified as small business entity with a tax rate of
27.5 on its revenue.
Answer to question 2:
As stated by the Australian taxation office resident companies which decides to join
the dividend imputation system would be required to pay credits with the franked dividend
declared by the company. Taking into the account the situation of Sigma Pty Ltd for the
financial year of 2015-16 and for the financial year of 2016-17 the imputation credits would
be taxed at a corporate tax rate of 27.5%.
Answer to question 3:
The total sum of tax that is payable by the Sigma Pty Ltd is enumerated in the table below;
The total sum of tax that is payable by the Yolade is enumerated in the table below;

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Answer to question 4:
If the shares are purchased by Yolande on 30th May it would not result in any
difference. The reason behind this is that the applicable tax rate for the dividend imputation
stands 27.5% and the tax would also be effective for Sigma Pty Ltd as well as for Yolande.
The tax rate that would be applied on Sigma Pty Ltd for the financial year ended is 27.5%
because the annual turnover of the business was $9 million that lower than the threshold limit
that is stated by the Australian Taxation Office.
Answer to question 5:
The tax rate that would be applied on Sigma Pty Ltd and the Yolande is different. The
reason for this is that the annual turnover for Sigma Pty Ltd has gone past the threshold limit
of $10 million resulting a change in the corporate tax rate for Sigma Pty Ltd and the Yolande.
The calculations are performed below;

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Conclusion:
On arriving at the conclusion it can be stated that the present system of dividend
imputation works by offering the Australian companies with the capability of issuing the
franked dividend to its shareholders. However the labor arrived with the proposal of making
non-refundable tax offset for the imputation credits. The report signifies that Labor;s policy
attracts wider criticism for creating large amount of wealth inequalities and introduces
intergenerational disparities. However the labor’s proposal is held advantageous since it
would benefit the government in saving a budgeted $11.4 billion over the period of four years
and around $59 billion in the coming decade. Overall, it can be stated that the policy of labor
helps in serving as the tool for economic growth and promotes capital formation among the
people.

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Reference List:
Abraham, M., Dempsey, M., & Marsden, A. (2015). Dividend reinvestment plans: a tax-
based incentive under the Australian imputation tax system. Austl. Tax F., 30, 435.
Balachandran, B., & Nguyen, J. H. (2017). Carbon Risk and Dividend Policy in an
Imputation Tax Regime.
Balachandran, B., Henry, D., & Vidanapathirana, B. (2016). Long-Term Price Reaction to
Dividend Reduction in an Imputation Environment–Evidence from Australia.
Balachandran, B., Khan, A. R., Mather, P. R., & Theobald, M. (2017). Insider Ownership and
Dividend Policy in an Imputation Tax Environment.
Balachandran, B., Khan, A., Mather, P., & Theobald, M. (2017). Insider ownership and
dividend policy in an imputation tax environment. Journal of Corporate Finance.
Burkhauser, R. V., Hahn, M. H., & Wilkins, R. (2015). Measuring top incomes using tax
record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2),
181-205.
Cannavan, D., & Gray, S. (2017). Dividend drop-off estimates of the value of dividend
imputation tax credits. Pacific-Basin Finance Journal, 46, 213-226.
Carling, R. G. (2015). Right or rort? Dissecting Australia's tax concessions. Centre for
Independent Studies.
Chang, C. W., Chen, M. C., & Chen, V. Y. (2017). Are Corporate Tax Reductions Real
Benefits under Imputation Systems?. European Accounting Review, 26(2), 215-237.
Cormick, R., & McLaren, J. (2018, January). Dividend imputation: a critical review of the
future of the system. In Australian Tax Forum (Vol. 33, No. 1).

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Cummings, J. R., & Wright, S. (2016). Effect of higher capital requirements on the funding
costs of Australian banks. Australian Economic Review, 49(1), 44-53.
Davis, K. (2016). DIVIDEND IMPUTATION and the Australian financial system.
Dixon, J. M., & Nassios, J. (2016). Modelling the impacts of a cut to company tax in
Australia. Centre for Policy Studies, Victoria University.
Faccio, M., & Xu, J. (2015). Taxes and capital structure. Journal of Financial and
Quantitative Analysis, 50(3), 277-300.
McClure, R., Lanis, R., Wells, P., & Govendir, B. (2017). The impact of dividend imputation
on corporate tax avoidance and controlling for outside director monitoring.
McClure, R., Lanis, R., Wells, P., & Govendir, B. (2018). The impact of dividend imputation
on corporate tax avoidance: The case of shareholder value. Journal of Corporate Finance, 48,
492-514.
McLaren, J., & Cormick, R. (2018). Dividend imputation: a critical review of the future of
the system. In Australian Tax Forum (Vol. 33, No. 1, p. 141). Tax Institute.
Melia, A., Docherty, P., & Easton, S. (2016). Net share issues and the cross‐section of equity
returns under a dividend imputation tax system. Accounting & Finance, 56(4), 1097-1117.
Nguyen, H. K. (2016). A question of the integrity of the dividend imputation system when
corporate tax rate changes: An Australian study. J. Austl. Tax'n, 18, 43.
Stewart, M. (2017). Australia’s Hybrid International Tax System: Limited Focus on Tax and
Development. In Taxation and Development-A Comparative Study (pp. 17-41). Springer,
Cham.

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Appendix:
Answer 3
Computation of Tax Payable for Sigma:
Total Tax Payable = Taxable Income x Corporate tax rate
= $10, 00,000 x 27.5%
= $275,000
Computation of Total tax payable by Yolande
Fully Franked dividend x Gross up value
= Fully Franked Dividend = $100,000 x 27.5%
= 100,000 x 27.5%
= 27,500

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Assessable Income = 100,000 x Tax rate 19c for each $1 over $18,200
= $24,632
Medicare levy @2% =
Total Assessable Income = $100,000 x 2% = 2000
Total Tax Payable = Tax on Taxable Income + Medicare Levy
= 24626 + 2000
= $26,632
Answer to 5:
Total Tax Payable = Taxable Income x Corporate tax rate
= $20, 00,000 x 30%
= $600,000

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Computation of Total tax payable by Yolande
Fully Franked dividend x Gross up value
= Fully Franked Dividend = $100,000 x 30%
= $100,000 x 30%
= $30,000
Assessable Income = 100,000 x Tax rate 19c for each $1 over $18,200
= $24,632
Medicare levy @2% =
Total Assessable Income = $100,000 x 2% = 2000
Total Tax Payable = Tax on Taxable Income + Medicare Levy
= 24626 + 2000
= $26,632

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