Topic 3 - Imputation Tax Flashcards
What is the Australian Imputation System is designed to avoid?
avoid double taxation for some investors
On what amount do TP who receive dividends get taxed on?
the grossed up dividend amount, company tax amount is then offset against the TP personal tax payable on the grossed up dividend amount.
Is one-dollar fully-franked dividend valued more or less than one dollar? what does this mean for firms?
more
This implies firms should try and pay dividends sufficient to exhaust their balance of imputation credits, within causing instability in dividends that might result and consequent adverse signalling effects.
when does debt have an advantage over equity?
when there is no imputation tax, i.e. interest on debt income is taxed at a lowed rate, imputation tax eliminates this
Which amount are Dividends are paid out of?
Dividends are paid out of after-corporate tax income
With classical taxation system why are companies biased toward debt financing?
interest income isn’t taxed twice.
for shareholders receive a full tax credit for corporate income tax already paid on corporate taxable income, at what amount is tax capped at?
tax paid by a resident individual shareholder is capped at personal tax amount.
how is the grossed up dividend amount calculated?
= cash dividend/( 1 - Company Tax Rate)
if a company does not fully frank its dividend which type of investors will it not attract?
we expect Australian companies not fully franking their dividends to attract a lower proportion of ‘retail’ investors paying high personal income tax (47c).
what are two reasons why Companies may not distribute the franking credits they have accumulated?
- conservative dividend policy or
- absence of profits
what does gamma represent?
the proportion of corporate tax paid out as franked dividends
what does it mean if gamma is greater than 0, in regards to WACC?
imputation WACC > classical WACC
imputed tax credits effectively lower the value of the tax shield on interest payments
Does a system of full dividend imputation mean shareholders and bondholders pay the same rate of personal income tax?
Yes, they get taxed at the same rate.
what type of investor prefers fully franked dividends?
higher tax bracket investors
if a firm doesn’t fully frank its dividend, what type of investors will it attract?
lower bracket retail investors
