A firm in Australia earns a pretax profit of $A10 per share. Suppose that it pays a corporate tax of $3 per share (30 percent tax rate)in taxes. The firm pays the remaining $A7 in dividends to a shareholder in the 40 percent marginal tax bracket. What is the amount of additional tax paid by the shareholder under an imputation tax system?

Question

Quizplus · Accepted Answer

The shareholder pays an additional $A1 in taxes under an imputation tax system. This is because the shareholder is taxed on the $A7 dividend at their marginal tax rate of 40%, resulting in an additional tax liability of $A2.80. However, the shareholder also receives a tax credit for the $A3 in corporate taxes that the firm has already paid, which reduces their tax liability by $A1.80. Therefore, the shareholder's net additional tax liability is $A1.

A Firm in Australia Earns a Pretax Profit of $A10