What is the imputation system?

What is the imputation system?

• A. It provides no relief to shareholders
• B. The shareholder receives a full tax credit equal to the underlying corporate income tax paid
• C. The credit is only on capital gains
• D. It doubles taxation on dividends

Answer: (B)

The imputation system attaches a tax credit to dividends to reflect the tax already paid by the company on those profits. When you receive a dividend, you declare the income but also receive a credit equal to the corporation tax paid on the underlying profits. This credit offsets your own tax on the dividend, so your overall tax is not a double charge on the same profits. In many cases the credit is effectively equal to the tax the company paid, providing relief to shareholders; if your personal tax rate is lower than that rate, you may even get a refund of the excess credits in some systems. The aim is to avoid taxing the same profit twice. That’s why the best description is that the shareholder receives a full tax credit equal to the underlying corporate income tax paid.

The imputation system attaches a tax credit to dividends to reflect the tax already paid by the company on those profits. When you receive a dividend, you declare the income but also receive a credit equal to the corporation tax paid on the underlying profits. This credit offsets your own tax on the dividend, so your overall tax is not a double charge on the same profits. In many cases the credit is effectively equal to the tax the company paid, providing relief to shareholders; if your personal tax rate is lower than that rate, you may even get a refund of the excess credits in some systems. The aim is to avoid taxing the same profit twice.

That’s why the best description is that the shareholder receives a full tax credit equal to the underlying corporate income tax paid.