You are a shareholder in a corporation which has announced a profit of $6 per share, of which it retains $2 for reinvestment and distributes the rest as dividend payments. A franking credit of $1.71 per share attaches to the dividend. Given that the personal tax rate is 35%, how much tax must you pay per share?

Question

Quizplus · Accepted Answer

The dividend received is $4 per share ($6 profit - $2 retained). With a franking credit of $1.71, the grossed-up dividend is $5.71 ($4 + $1.71). At a 35% tax rate, the tax on the grossed-up dividend is $2.00 ($5.71 * 0.35). However, since the franking credit of $1.71 has already been paid by the corporation, the additional tax you must pay per share is $0.29 ($2.00 - $1.71), which rounds to $0.28, making option A correct.

You Are a Shareholder in a Corporation Which Has Announced