Webster Holding Ltd is a company which owns a number of fashion brands. If Webster Holding makes a taxable profit of $1,000,000 in the 2012 financial year and chooses to pay 100% of its profit after tax as a dividend, how much tax is paid by shareholders, assuming their marginal tax rate is 45%? Assume the company tax rate is 30%.

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Quizplus · Accepted Answer

The company pays 30% tax on $1,000,000, which is $300,000, leaving $700,000 as profit after tax. If this is paid as a dividend, shareholders pay 45% tax on $700,000, which is $315,000. However, they receive a credit for the $300,000 company tax already paid, so they pay an additional $15,000 in tax.

Webster Holding Ltd Is a Company Which Owns a Number