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Australian dividend imputation system
The Australian dividend imputation system is a corporate tax system in which some or all of the tax paid by a company may be attributed, or imputed, to the shareholders by way of a tax credit to reduce the income tax payable on a distribution. In comparison to the classical system, dividend imputation reduces or eliminates the tax disadvantages of distributing dividends to shareholders by only requiring them to pay the difference between the corporate rate and their marginal rate. If the individual’s average tax rate is lower than the corporate rate, the individual receives a tax refund.
The objective of the dividend imputation system is to eliminate double taxation of company profits, once at the corporate level and again on distribution as dividend to shareholders. Under the previous system, the company and shareholders had an incentive for the taxed income of the company to be retained by the company, or for the business activity not to be undertaken using a corporate structure.
Before 1987, an Australian company would pay company tax on its profits at a flat rate of 49%; and if it then paid a dividend, the shareholder was subject to income tax on that dividend. The company and shareholders had an incentive for the taxed income of the company to be retained by the company. Paying a dividend gave raise to double taxation, once by the company at the corporate rate and then on dividend income in the hands of the company's shareholders.
Dividend imputation was introduced in Australia in 1987 by the Hawke–Keating Labor Government to create a "level playing field" and stopping the double taxation. The company tax rate was reduced to 39% in 1988 and 33% in 1993, and increased again in 1995 to 36%, to be reduced to 34% in 2000 and 30% in 2001, where it has been since.
Eligibility rules (below) were introduced by the Howard–Costello Liberal Government in 1997, with a $2,000 small shareholder exemption. The small shareholder exemption was raised to the present $5,000 in 1999. Since 1 July 2000, franking credits have been fully refundable, not just reducing tax liability to zero, and the "holding period rule" has applied. In 2002, preferential dividend streaming was banned. In 2003, New Zealand companies could elect to join the system for Australian tax they paid.
In 2015/16, designated "small business entities" with an aggregated annual turnover threshold of less than $2 million became eligible for a lower tax rate of 28.5%. Since 1 July 2016, the tax rate for business entities with aggregated annual turnover of less than $10 million has been 27.5%. From 2017/18, corporate entities eligible for the lower tax rate have been known as "base rate entities" and the turnover threshold has remained at $10 million, though the base rate entity threshold (the aggregated annual turnover threshold under which entities will be eligible to pay a lower tax rate) has continued to rise.
A company would report and pay tax at the company tax rate in the normal manner. The company would keep track of the company tax it has paid in a franking account. If and when the company distributes money to shareholders in the form of dividends, it would indicate to shareholders the amount of franking credits it has applied to the dividend, and deduct the amount from its franking account. The franking amount cannot be greater than the company’s tax rate. When the shareholders lodge their tax returns, they include the dividend and the franking amount in their taxable income, but the shareholders are also entitled to claim a tax credit for this franking amount. The shareholders would then pay tax calculated on the basis of their marginal tax rate, which may be higher or lower than the company tax rate.
Companies which have paid Australian company tax can declare how much of the tax paid, recorded as franking credit, is to be attached to a dividend. Dividends paid with the maximum franking credit allowable are called fully franked dividends, and Australian-resident shareholders who receive them would declare both the dividends and the associated franking credits on their tax returns in addition to all other ordinary income. They are also entitled to claim back a credit for the value of the franking credit. A company may distribute dividends though it has no franking credits (perhaps because it has been making tax losses), which are called an unfranked dividends. It may also pay a franked portion and an unfranked portion, known as partly franked. An unfranked dividend (or the unfranked portion) is ordinary income in the hands of the shareholder.
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Australian dividend imputation system
The Australian dividend imputation system is a corporate tax system in which some or all of the tax paid by a company may be attributed, or imputed, to the shareholders by way of a tax credit to reduce the income tax payable on a distribution. In comparison to the classical system, dividend imputation reduces or eliminates the tax disadvantages of distributing dividends to shareholders by only requiring them to pay the difference between the corporate rate and their marginal rate. If the individual’s average tax rate is lower than the corporate rate, the individual receives a tax refund.
The objective of the dividend imputation system is to eliminate double taxation of company profits, once at the corporate level and again on distribution as dividend to shareholders. Under the previous system, the company and shareholders had an incentive for the taxed income of the company to be retained by the company, or for the business activity not to be undertaken using a corporate structure.
Before 1987, an Australian company would pay company tax on its profits at a flat rate of 49%; and if it then paid a dividend, the shareholder was subject to income tax on that dividend. The company and shareholders had an incentive for the taxed income of the company to be retained by the company. Paying a dividend gave raise to double taxation, once by the company at the corporate rate and then on dividend income in the hands of the company's shareholders.
Dividend imputation was introduced in Australia in 1987 by the Hawke–Keating Labor Government to create a "level playing field" and stopping the double taxation. The company tax rate was reduced to 39% in 1988 and 33% in 1993, and increased again in 1995 to 36%, to be reduced to 34% in 2000 and 30% in 2001, where it has been since.
Eligibility rules (below) were introduced by the Howard–Costello Liberal Government in 1997, with a $2,000 small shareholder exemption. The small shareholder exemption was raised to the present $5,000 in 1999. Since 1 July 2000, franking credits have been fully refundable, not just reducing tax liability to zero, and the "holding period rule" has applied. In 2002, preferential dividend streaming was banned. In 2003, New Zealand companies could elect to join the system for Australian tax they paid.
In 2015/16, designated "small business entities" with an aggregated annual turnover threshold of less than $2 million became eligible for a lower tax rate of 28.5%. Since 1 July 2016, the tax rate for business entities with aggregated annual turnover of less than $10 million has been 27.5%. From 2017/18, corporate entities eligible for the lower tax rate have been known as "base rate entities" and the turnover threshold has remained at $10 million, though the base rate entity threshold (the aggregated annual turnover threshold under which entities will be eligible to pay a lower tax rate) has continued to rise.
A company would report and pay tax at the company tax rate in the normal manner. The company would keep track of the company tax it has paid in a franking account. If and when the company distributes money to shareholders in the form of dividends, it would indicate to shareholders the amount of franking credits it has applied to the dividend, and deduct the amount from its franking account. The franking amount cannot be greater than the company’s tax rate. When the shareholders lodge their tax returns, they include the dividend and the franking amount in their taxable income, but the shareholders are also entitled to claim a tax credit for this franking amount. The shareholders would then pay tax calculated on the basis of their marginal tax rate, which may be higher or lower than the company tax rate.
Companies which have paid Australian company tax can declare how much of the tax paid, recorded as franking credit, is to be attached to a dividend. Dividends paid with the maximum franking credit allowable are called fully franked dividends, and Australian-resident shareholders who receive them would declare both the dividends and the associated franking credits on their tax returns in addition to all other ordinary income. They are also entitled to claim back a credit for the value of the franking credit. A company may distribute dividends though it has no franking credits (perhaps because it has been making tax losses), which are called an unfranked dividends. It may also pay a franked portion and an unfranked portion, known as partly franked. An unfranked dividend (or the unfranked portion) is ordinary income in the hands of the shareholder.