Under an imputation tax system,what will be the shareholder's personal tax liability on $1 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 47 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%, which leaves 70% of the income available for distribution as dividends to the shareholders. As the dividend is fully franked, it includes a tax credit for the tax paid by the company. The tax credit is equal to the company tax rate of 30%, so the dividend of $1 includes a tax credit of $0.30. The shareholder's personal tax liability is then calculated on the dividend of $1 plus the tax credit of $0.30, giving a total of $1.30. As the shareholder's personal average tax rate is 47%, the tax liability on $1.30 is $0.61. Therefore, the net dividend the shareholder receives is $1 - $0.61 = $0.39. Therefore, the personal tax liability on $1 of income generated by the company is $0.61, which means the shareholder effectively receives $0.39 after tax. So, the correct answer is B) $0.17 (which is 39% of $0.70).

Under an Imputation Tax System,what Will Be the Shareholder's Personal