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

Question

Quizplus · Accepted Answer

The imputation tax system allows shareholders to claim a tax credit for the corporate tax already paid by the company. In this case, the shareholder is in the 40% tax bracket, so they can claim a tax credit of $A3 (30% of $A10). This means that the shareholder's taxable income is only $A7, and they will pay $A1 in taxes (40% of $A7).

A Firm in Australia Earns a Pretax Profit of $A10