Taxation Law 2: Analysis of Dividend Imputation System in Australia

This report provides a comprehensive analysis of Australia's dividend imputation system. It begins by outlining the present system's operations, including franking credits and tax implications. The report then delves into the historical context, explaining the reasons for introducing the dividend imputation system in the 1980s. A significant portion of the report is dedicated to examining the Labor party's proposed reforms to the system, including the removal of imputation credit refunds and the Australian investment guarantee. The report evaluates the advantages and disadvantages of these policies, considering aspects such as fiscal adequacy, fairness, and impact on investors and superannuation funds. The report also discusses the generally accepted attributes of a good taxation policy, providing a balanced view of the proposed changes and their potential consequences. Finally, the report addresses specific questions related to the dividend imputation system, offering a well-rounded understanding of the topic.

Running head: TAXATION LAW
Taxation Law
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Table of Contents
Answer to Task A:.....................................................................................................................2
Present system of Dividend Imputation Operations:.................................................................2
Reasons for Introducing Dividend Imputation System in 1980:................................................3
Labour Proposal to reform the dividend imputation system:.....................................................4
Answer to task B:.......................................................................................................................5
Advantages and disadvantages of labours’ Policy:....................................................................5
Advantages of labour policy:.....................................................................................................6
Removal of imputation credits refunds......................................................................................6
Australian investment guarantee:...............................................................................................7
Generally accepted attributes of good taxation policy:..............................................................7
Answer to Task C:......................................................................................................................8
Answer to question 1:.................................................................................................................8
Answer to question 2:.................................................................................................................8
Answer to question 3:.................................................................................................................9
Answer to question 4:.................................................................................................................9
Answer to question 5:...............................................................................................................10
Reference List:.........................................................................................................................11

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Answer to Task A:
Present system of Dividend Imputation Operations:
Australia is regarded as one of the few OECD nations that yet operate the system of
full dividend imputation. Since the year 1987 the Australian has been constantly operating the
dividend imputation system for around 30 years (Barkoczy, 2014). The main changes that
was introduced in relation to the operation of this system is the provision for rebate, in which
the allowable rebates relating to franking credits prior to 1st July 2000 was capped based on
the tax liability of the taxpayer and any additional imputation credit was vanished. Under the
new provision that was introduced during July 2000 was the complete amount of franking
credits that is refunded to the taxpayer despite the franking credits goes beyond the tax
liabilities. As a result, the shareholders does not occur wastage of excess amount of franking
credits and the value of imputations is retained by the taxpayer with lower income and having
the marginal personal tax rate less than the statutory company tax rate.
The dividend imputation system in Australia, the organizations are required to keep
the records of the franking account that keeps the track of records relating to the franking
account that keeps track of the payment of income tax that is made to the ATO (Brokelind,
2014). In the franking account of the company the balance of maximum amount of franking
credits that is distributable to the shareholders is reflected. Alternatively, an organization
cannot frank the dividends that is the imputation credits is attached to the dividends. An
organization cannot frank the dividends higher than the sum of company income tax that was
paid.
When a company that is an Australian resident pays tax at the lesser rate in
comparison to the statutory tax rate, there would be inadequate franking credits in the
franking accounts of the company to make the dividends entirely franked (Coleman & Sadiq,

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2013). Similarly, in the circumstances where the organizations do not pays any tax on income
following the application of accessible levy offsets the distributed dividends is required to be
unfranked dividends. Similarly, in Australia the present system of dividends is regarded as
the system of prepayment of tax based on the corporate profits as domestic shareholders
generally pay income tax based on the distributed profits of the company in respect of the
relevant marginal tax rate (Grange et al., 2014). An important consideration in this regard is
that this view is only applied on organizations where all the shareholders of the company are
Australian resident for taxation purpose.
The dividend imputation operates by providing the Australian companies with the
capacities of issuing franked dividends to the shareholders. These represents the dividends
that are paid after the tax relating to which the shareholders obtain the after tax dividends as
well as the franking credits signifying that the tax of the company is already paid on such
income (James, 2014). Under the present system of dividend imputations, the franking credit
can be offset against the tax liability of the shareholders or if the tax liability is exhausted the
dividends can be redeemed in cash from the Australian Taxation Office. The operation of the
imputation is based on the principles of return on equity where the income received from
company as dividends should be levied together with the other income at the taxpayer’s
marginal income tax rate.
Reasons for Introducing Dividend Imputation System in 1980:
In the early 1980s several companies in Australian corporations turned out to be
highly leveraged that are due in portions to tax the bias favouring the debt financing (Kenny,
2013). The primary reason for introducing the dividend imputation system was to manage the
problem relating to the double taxation of organizations profits that are relative to the taxation
of the unincorporated enterprises.

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The reason for introducing the dividend imputation was to provide the shareholders
with the franking credits that can be offset against the personal income tax liabilities (Krever,
2013). In the non-existence of dividend imputation system, the profits of the company may be
taxed twice both at the company and later at the personal level.
Dividend imputation system has also disregarded the earlier existing system of
distortions that provides incentives for financing debts. Interested is substrate from the
corporate income and hence it is only taxed on one occasion when it is received at the
personal level.
Labour Proposal to reform the dividend imputation system:
A plan of reformation to the dividend imputation system of Australia has been
announced by the labour party (Morgan et al., 2013). Under the present system of dividend
imputation when an organization pays dividend to the shareholders it possesses the option of
passing the credit relating to any amount of tax that is paid by the company on its profits.
Presently if the imputation credit is received by the shareholder goes further than the tax
liabilities the shareholders would be eligible for the cash refund for the excess amount.
The Labor has proposed that it its intention is to remove the ability of the individuals
and superannuation funds in order to receive the excess of imputations of credits from 1st July
2019 that makes the imputation credits a non-refundable tax offsets. Such change is not
proposed to implement on charities and non-for-profit firms (Sadiq et al., 2014). The labour
has proposed for the self-managed super funds under the pension mode. The proposal
includes cashing the entire amount of holding of Australian shares that can be tax free and the
rollover of cash would free up the superannuation account with big funds by enabling the
Australian shares as the preferred class of assets.

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The labor has proposed the new arrangements for depreciation and would reward the
businesses prepared to invest in Australia with provision of generous write off provision. This
would allow the shareholders with the immediate 20% reduction relating to any new eligible
asset that has more than the worth of $20,000 (Woellner, 2013). The new proposal for
reformation by labor would reverse the change that is made to the policy as this would enable
the individuals and super funds to claim refunds for any amount of excess imputation credits
that is not employed for setting off the tax liabilities.
Answer to task B:
Advantages and disadvantages of labours’ Policy:
The labour policy has the disadvantages as it negatively impact the cash refunds for
the wealthy investors. Any form of policy that creates a negative impact on the retirees is
regarded as bold and possibly it is politically held to be dangerous (Woellner et al., 2014).
Additionally, the labour policy has been negatively keeping with on the negative gearing and
capital gains tax. Amid the major disadvantages one of the greatest problems was the
aspiration of pushing large amount of money out of money to the older people that does not
need it. Such policies not only took out the money from the budget but also ensured that the
problems would remain long following the expiration of the political times.
The policy served to entrench inequality of wealth among the citizens. Under the
labour policy the income inequality frequently gets attention (Pinto, 2013). The labour policy
also suffers from the disadvantages of wealth inequalities in bigger proportions and is
accompanied with intergenerational disparities. The labour policies has been criticized widely
as majority of Australian rich people holding around 40% of the national income but
approximately 65% of the nationwide wealth is held by those that are above the 55 years. The

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policy designed by the labour is not only to keep the policy but also to garner the same and
pass on to their next generation.
The labour proposal suffers from the disadvantage as under the self-managed
superfunds in pensions may enable holding members to loss the excess amount of franking
credits (Woellner et al., 2016). A question of fairness is raised under the imputation credit
proposal by the labor. The policies of effective distribution of assets where one party dies the
survivor can retain a portion of their pension and all the franking credits and this ultimately
raises the questions of imputation credit. The labor was chasing revenue since it has lost the
control on spending and the dividend imputation measure simply overlooked the fairness and
was instead classified as brutal tax grab.
Advantages of labour policy:
Removal of imputation credits refunds
The advantages of the labor policy is that it eliminates the imputation credits refunds.
The imputation credits for the individual and the superannuation funds would no longer be
considered refundable tax offset. This represents that the imputation credits can be employed
lower down the payment of tax however the taxpayer would not be able to obtain the refunds
for excess amount of imputation credits (Barkoczy, 2016). The method is considered to be
advantageous because it would enable the government to save a budgeted amount of $11.4
billion over the period of four years with $59 billion over the next decade.
The policy of labor would only be applicable to the individuals and to the
superannuation funds. Income tax exemption charities and not-for-profit institutions with
deductible amount of gift recipient status would still be receiving the refunds. The policy of
the labour can be justified based on the criteria that the cost to the budget would be
advantageous for the current refunds. Additionally the taxpayers with higher wealth and self-

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managed super funds might have several options of recreating their tax matters. The policy
of the labour is advantageous as it would assure both the parties in last year that the
superannuation levy would remain stable for short to medium term.
Australian investment guarantee:
The labor policy is considered advantageous as the proposed policy of Australian
Investment Guarantee would enable a business to expense around 20% of their amount of
eligible depreciation assets in the very first year of new investments (Woellner et al., 2014).
The labor policy is created to fulfil the both the apprehensions of being not as much of costly
and by being more incentive oriented for making new venture in the capital assets.
A conclusive opinion can be formed by stating that the policy of labor is justifiable
based on the costs to the budget and labor distributional analysis represents who would
benefit from the present refunds (Grange et al., 2014). Additionally the labour policy can be
justified by stating that the self-managed superannuation funds might have numerous options
of restructuring their tax affairs. The policy enables creating additional changes in the
superannuation industry that assures both the parties of stable superannuation funds with
stable short and medium term returns.
Generally accepted attributes of good taxation policy:
The system of taxation must be in such a manner that it satisfy the requirements of
rising state activities and attaining the objectives of the society. The policy of labour can be
considered productive with fiscal adequacy. An important principle of good tax system is to
look into the overall development of the nation with sufficient amount for government in
improving the welfare and development in Australia (Brokelind, 2014). It can be stated that
the labor proposal of removing the imputation credits refund aims at reducing the payment of
tax with overall development and welfare of the economy as well.

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A good system of taxation is required to follow the principle of diversity. This
represents that there must not be any sole or few system of levying taxes to raise funds for
government. The labor tax policy is considered to be a good tax policy since tax rate is
designed in a manner that it would not only result in revenue for the government but would
also save approximately 11.4 billion of the sum over the four year period and $59 billion over
the next decade (Sadiq et al., 2014). Since it is largely noticed that the negative gearing, CGT
discounts, cost of administering tax matters have always had two sides relating to tax
proposal.
The policy proposed by labor can be viewed as tax system that contributed to both
government and the public revenue as well. With diverse principles present in the labour
policy the principles of fiscal adequacy and equity is better satisfied (Coleman & Sadiq,
2013). The labor policy reduces the excessive amount of reliance on one single base in order
to avoid adverse impact on the economy. The labor policy serves as the instrument of
economic growth and encourages capital formation.
Answer to Task C:
Answer to question 1:
The corporate tax rate for sigma during the year 2015-16 was 30% this is because the
Sigma total turnover was $12 million. However, in the following year of 2016/17 the
corporate tax rate for Sigma Pty Ltd stood 27.5% (Coleman & Sadiq, 2013). The company
for the year 2016/17 would be classified as small business entity with lower company tax rate
of 27.5% for having an aggregate turnover of less than $10 million (i.e. $9 million).
Answer to question 2:
A resident company in Australia that has undertaken the decision of joining the
Australian imputation system might be paying credits with the franked dividend. As evident

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in the current situation of Sigma Pty Ltd for each of the financial years the imputation credits
for the corporate tax rates has stood 27.5 for both the 2015/16 and for 2016/17.
Answer to question 3:
Tax Payable by Sigma
Computation of Tax Payable
In the Books of Sigma
For the year ended 30 June 2017
Particulars Amount
Assessable Income 10,00,000
Tax Payable (27.5%) 275000
Tax payable by Yolande:
Computation of Tax Payable
In the Books of Yolande
For the year ended 30 June 2017
Particulars Amount
Australian Sourced Dividend Income
Fully Franked Dividend (Net) 72500
Gross Up Franking Credits 27500
Total Assessable Income 100000
Tax on Taxable Income 24632
Add: Medicare levy 2000
Total Tax Payable 26632
Answer to question 4:
No, the answer would not be different if the shares were purchased by Yolande on 30th
May 2017 since the imputation tax rate would continue to remain 27.5% that would be
effective for both Yolande and Sigma. The corporate tax rate for the year 2016/17 was 27.5%
and the company had the annual turnover of less than $10 million.

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Answer to question 5:
The corporate tax rate for both Yolande and Sigma Pty Ltd would be different
because the aggregate turnover limit have surpassed the aggregated $10 million threshold
limit and as a result for the financial year 2016/17 the tax payable amount for both Yolande
and Sigma would be different. The below stated is the computations for tax payable;
Computation of Tax Payable
In the Books of Sigma
For the year ended 30 June 2017
Particulars Amount
Assessable Income 20,00,000
Tax Payable (30%) 600000
Computation of Tax Payable
In the Books of Yolande
For the year ended 30 June 2017
Particulars
Amoun
t
Australian Sourced Dividend Income
Fully Franked Dividend (Net) 70000
Gross Up Franking Credits 30000
Total Assessable Income
10000
0
Tax on Taxable Income 24632
Add: Medicare levy 2000
Total Tax Payable 26632

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