Question

Which of the following is NOT correct regarding taxation in Australia?

a. The imputation tax system allows double taxation of dividends.

b. Franking credits can be used to offset the investor's other sources of taxable income.

c. Australian companies have greater incentives to initiate dividends and raise existing dividend payouts under the imputation tax system.

d. Under the classical tax system, a company's profits were first taxed at the company tax rate, and dividends paid were taxed again at the investor's marginal tax rate

Answer 1

In the classical system, the company had an incentive for the taxed income of the company to be retained, because they were taxed at the company rate and again at the marginal tax rate once dividends were paid.

The objective of the dividend imputation system is to eliminate double taxation of company profits, once at the corporate level and again on distribution as dividend to shareholders. Thus this promotes the initiation of dividend paying.

Thus, all the above statements except the first one hold true.

Answer - a)

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