Analysis of Dividend Imputation Taxation System in Accounting

This report provides a detailed analysis of the dividend imputation taxation system, focusing on its role in mitigating the effects of double taxation. It discusses the introduction of the dividend imputation policy in 1987 and how it eliminates double taxation on income received by investors from distributed dividends. The report explains the function of franking credits or imputation credits, which allow Australian companies to pass on taxes paid at the company level to shareholders. It further elaborates on the conditions under which companies pay franking credits and how these credits reduce income tax on dividends. The impact of dividend imputation is contingent on the tax treaty between countries, and the report highlights considerations for both domestic and international investors, emphasizing the importance of a company's taxation policy. The document is available on Desklib, a platform offering a variety of study resources for students.

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).

2ACCOUNTING AND FINANCE
The franking credits are usually paid by the company when the company does not pay tax
on the profit generated on the income generated and the taxation effect on the same varies
whether the company pays tax or not on the reported annual income by the company. The effect
of dividend imputation will be dependent on the tax treaty between the two countries and the
following agreement between the two countries will need to be taken into account for the same.
For the domestic investor it will be dependent on the taxation effect and the taxation policy of
the company (Chan & Lin, 2017).

3ACCOUNTING AND FINANCE
Reference
Cannavan, D., & Gray, S. (2017). Dividend drop-off estimates of the value of dividend
imputation tax credits. Pacific-Basin Finance Journal, 46, 213-226.
Chan, C. H., & Lin, M. H. (2017). Imputation tax system, dividend payout, and investor
behavior: Evidence from the Taiwan stock exchange. Asia Pacific Management Review,
22(3), 146-158.
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.
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.