Under an imputation tax system,what will be the dividend after tax on $500 of income generated by a company when 100 per cent of the after- tax income is paid out to the shareholder as a fully franked dividend and the shareholder's personal average tax rate is 35 per cent? The company tax rate is 30 per cent.

Question

Quizplus · Accepted Answer

Under an imputation tax system, the company pays tax at 30% and the remaining after-tax profit is distributed to shareholders as a fully franked dividend, meaning the tax paid by the company is imputed to the shareholder.

The dividend before franking credit is $500. The franking credit is calculated as (after-tax profit / (1 - company tax rate)) - after-tax profit. 
In this case, the franking credit is (500 / (1-0.3)) - 500 = $214.29.

The shareholder's taxable income is $500 + franking credit, which is $714.29. The tax payable on this amount at a personal tax rate of 35% is $250, which is the difference between the taxable income and the tax-free threshold.

Therefore, the dividend after tax is $500 - $250 = $250, plus the franking credit of $214.29, giving a total of $464.29. This is closest to option B, $325.

Under an Imputation Tax System,what Will Be the Dividend After