What Is Dividend Imputation
Dividend imputation is a mechanism to manage the problem of double taxation of company profits relative to the taxation of the shareholders. It provides shareholders with a franking credit which can be offset against personal income tax liabilities. Without dividend imputation, company profits distributed to shareholders would be taxed twice, once at the company level and then again at the personal level.
When Did Dividend Imputation Start In Australia?
Australia introduced dividend imputation since 1987, as a means of eliminating the double taxation of cash payouts from a corporation to its shareholders. Through the use of tax credits called “franking credits” or “imputed tax credits,” the tax authorities are notified that a company has already paid the required income tax on the income it distributes as dividends. The shareholder does not then have to pay tax on the dividend income.
Which Countries Have Dividend Imputation?
Other countries that have full dividend imputation schemes include:
- New Zealand
In countries without dividend imputation, corporate dividends are taxed twice. Double taxation of dividends occurs when both a company and a shareholder pay tax on the same income. The company pays taxes on profits and subsequently distributes a dividend out of its after-tax profits. Shareholders must then pay tax on the dividend received.
Nine countries that once offered dividend imputation have either changed or ended the practice. These countries include the following:
- United Kingdom
The United Kingdom and Ireland, for example, previously offered partial imputation with tax credits that were, effectively, portions 12 cents to 25 cents on each dollar. The partial imputation in the United Kingdom provided a 20% refund against a 33% corporate tax rate. Starting in 1997, however, the government moved away from this, first by eliminating the refund to tax-exempt shareholders that include pension funds. Then, in 1999, the refund rate was cut to 10%.
Germany, Finland, Norway, and France all previously offered full dividend imputation. France offered tax credits equal to 50% of the face value of the dividend. After the repeal, these countries taxed dividends at a rate of 50% or greater. Germany did away with its dividend imputation program with the intent of reducing the nation’s tax rate. Finland, likewise, lowered its corporate tax rate after dividend imputation as repealed. Norway, on the other hand, did not lower its corporate tax rate when dividend imputation ended.
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