Question

The Li Family Trust is a discretionary family trust with two adult resident beneficiaries, Emma and Peter. During this income year, the activities of the trust gave rise to the following:

	$
Loss from rental property	(6,000)
Interest income from term deposits	4,000
Cash received from fully franked dividends	14,500
A capital gain from the sale of BHP shares that had been held for two years	10,000

The trustee of the trust resolved to distribute 100% of the trust income to Emma.

Emma also has the following income:

•          Salary of $18,000 from which PAYG withholding tax instalments of $2,800 have been deducted.

•          Work-related expenses of $275.

Emma has private hospital cover.

Based on the facts above:

1          Calculate the taxable income and tax payable or refundable for Emma for the income year.

2          Would your answer differ if the Li Family Trust made a rental loss of $40,000?

Answer

(1) Net income of the trust:

interest income		$4,000+
dividend		14,500+
imputation credit ($14,500 x 30 / 70)		6,214+
Capital gain (50% discount)	5,000+
rental loss		(6,000)-
		=23,714

Taxable income of Emma:

assessable income from trust: s 97		$23,714+
salary ($18,000 + 2,800)		20,800+
work-related expenses	(275)-
		=44,239
Tax liability		5,924
Add: Medicare levy		885
Less:     PAYG withholding		(2,800)
imputation credit		(6,214)
Tax refund		(2,205)

Answer already complete however my question is how'd they get

imputation credit ($14,500 x 30 / 70)

where did the 30/70 come from?

Answer 1

Answer -

where did the 30/70 come from?

Fully franked dividend

To avoid double taxation, the government introduced the dividend imputation system which allows shareholders to account for the tax which has already been paid by the company.

If the company has issued a fully franked dividend this means the company has already paid 30 per cent tax on its profits (the company tax rate). This can be passed to the shareholder as a tax concession and is referred to as a franking credit or imputation credit

So we need to calculate as follows

Dividend Amount * Company Tax Rate/(100% – Company Tax Rate)

= $14500 *(30/70) [30% is used as the dividend is fully franked and companies pay 30% tax]

*Assuming tax rate is 30%

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