Previously the corporate tax rate was 39% and now it has been reduced to 30%.
Dividend imputation was brought in during the year 1987. It is a tax reform brought about by the Hawke/Keating government. Before the reform a company had to pay company tax on its gains and after that if the company paid a dividend it was also taxed again as income for the shareholder and this led into a form of double taxation.
Dr Henry who is leading the Federal Government's taxation review, stated that, "If domestic shareholders have access to full company tax imputation, the company tax actually increases their dividend income - both in pre-tax and post-tax terms".
In 1997 the eligibility rules for the same were introduced, with a $2000 minute shareholder exemption. In the year 1999 the exemption was enhanced to the current $5000. In the year 2000 franking credits were made completely refundable rather than decreasing tax liability to zero. In the year 2002 preferential dividend streaming was cast out. Australia's arrangement of dividend imputation which is otherwise known as franking is a key concept which new capitalists had to realize. Australian companies did not escape illogical capital allotment decisions. The imputation system encourages a more liberal distribution of profits by dividends.
The most significant facet of this system is that Australian resident individual shareholders get a rebate in respect of tax which is already paid by the company on dividend income. This refund is known as the franking rebate. For instance if an individual pays tax on other income at the highest marginal rate of 47% which excludes the 1.7% Medicare then his tax liability on a entirely franked dividend is cut down from 47% to 17% by the franking rebate.
At the same time if a taxpayer has to pay tax on other income at the marginal rate of 30% excluding the 1.7% Medicare levy then his tax liability is decreased from 30% to -9% by the franking rebate.
Lastly when an individual pays tax on other income at the trivial rate of 20% exclusive of the 1.7% Medicare levy then the tax liability on a totally franked dividend for such a taxpayer is cut down from 20% to -25% by the franking rebate. As the franking rebate is more than the payable tax, the rest of the rebate can be utilised to offset other income like salary etc.
As per calculations the individual mentioned above will have a tax credit of $250.00.
Present treatment of resident shareholders in resident company with source of income in Australia:
Taxable Income = $1000
Australian company tax =$ 300 (which creates $300 of franking credits)
Income after tax = $ 700
If the company wants to pay off all its after tax income the highest franking credit that it can apportion for distribution is $300. The consequences of an allocation of $700 along with a franking credit of $300 for a 48.5 % marginal rate shareholder, a 31.5 % marginal rate shareholder, for an Australian corporate shareholder and a superannuation fund shareholder is as follows:-
48.5% Marginal rate shareholder
Dividend = $ 700
Franking credit =$ 300
Dividend grossed up =$1000
Tax @ 48.5% =$ 485
Tax offset =$ 300
Net tax payable = $ 185
Dividend after tax =$ 515