A firm in Australia earns a pretax profit of $A10 per share.Suppose that 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 the 40% 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 receives a dividend of $A7 and pays $A2.80 in taxes (40% of $A7). Under an imputation tax system, the shareholder receives a tax credit of $A3 (the amount of corporate tax paid by the firm). This reduces the shareholder's tax liability to $A2.80 - $A3 = $A0.80. Therefore, the additional tax paid by the shareholder under an imputation tax system is $A0.80.

A Firm in Australia Earns a Pretax Profit of $A10