Dividend imputation is a corporate tax system in which some or all of the tax paid by a company may be attributed, or imputed, to the shareholders by way of a tax credit to reduce the income tax payable on a distribution. In comparison to the classical system, it reduces or eliminates the tax disadvantages of distributing dividends to shareholders by only requiring them to pay the difference between the corporate rate and their marginal tax rate. The imputation system effectively taxes distributed company profit at the shareholders' average tax rates.

Australia, Malta and New Zealand have imputation systems. Canada, Korea and the United Kingdom have a partial imputation system. Germany had a dividend imputation system until 2000 and France until 2004.

The objective of the dividend imputation system is to collect tax on distributed income at the shareholder's tax rate, in order to eliminate double taxation of company profits, once at the corporate level and again on distribution as a dividend to shareholders. Other jurisdictions which do not have dividend imputation achieve a similar result by only taxing dividends at the shareholder level. For example, Chile has tax integration, and all applicable company profits are taxed only at the shareholder's tax rate, achieving a similar outcome to imputation. Others (Singapore, for example) eliminate double taxation in a different way, by not taxing dividends in the hands of the shareholder and only at the company level. Under this arrangement the shareholders obtain a tax benefit even though the company may not have paid any tax at the corporate level, and it also benefits non-resident shareholders.

Australia

The Australian tax system allows companies to determine the proportion of franking credits to attach to the dividends paid. A franking credit is a nominal unit of tax paid by companies using dividend imputation. Franking credits are passed on to shareholders along with dividends.

Australian-resident shareholders include in their assessable income the grossed-up dividend amount (being the total of the dividend payable plus the associated franking credits). The income tax payable by the shareholders is calculated, and the franking credits are applied to offset the tax payable. In Australia and New Zealand the result is the elimination of double taxation of company profits.

History

Dividend imputation was introduced in 1987, one of a number of tax reforms by the Hawke–Keating Labor Government. Prior to that a company would pay company tax on its profits and if it then paid a dividend, that dividend was taxed again as income for the shareholder, i.e. a part owner of the company, a form of double taxation.

In 1997 the eligibility rules (below) were introduced by the Howard–Costello Liberal Government, with a $2,000 small shareholder exemption. In 1999 that exemption was raised to the present $5,000. In 2000, franking credits became fully refundable, not just reducing tax liability to zero. In 2002, preferential dividend streaming was banned. In 2003, New Zealand companies could elect to join the system for Australian tax they paid.

Operation

A shareholder's taxable income is grossed up to include the value of the company tax deemed to have been prepaid on the dividend. This value is also credited to the shareholder.

New Zealand

New Zealand introduced a dividend imputation system in 1989. It operates on similar principles to the Australian system. A shareholder receiving a dividend from a company is entitled to an "imputation credit", which represents tax paid by the company, and is used to reduce or eliminate the shareholder's income tax liability.

United Kingdom

From 1973 to 1999, the UK operated an imputation system, with shareholders able to claim a tax credit reflecting advance corporation tax (ACT) paid by a company when a distribution was made. A company could set off ACT against the company's annual corporation tax liability, subject to limitations.

In 1999 ACT was abolished. Shareholders receiving a dividend were still entitled to a tax credit to offset their tax liability, but the tax credit no longer necessarily represented tax paid by the company, and could not be refunded to the shareholder. The tax credit was abolished as of 6 April 2016 and replaced with a tax-free dividend allowance of £5,000 (2017/2018). The dividend allowance was reduced to £2,000 from 6 April 2018, and then to £1,000 for the April 2023 to April 2024 tax year. A further reduction down to £500 was announced in the Budget Statement in November 2022. Taxation legislation refers to the dividend allowance as "the dividend nil rate".

See also

  • Corporate tax
  • Dividend stripping, on buying shares to access dividends
  • Dividend tax
  • :fr:Avoir fiscal (in French)

References

  • Australian Taxation Office guide You and Your Shares 2005, product NAT 2632-6.2005 [https://web.archive.org/web/20060103150624/http://www.ato.gov.au/individuals/content.asp?doc=%2Fcontent%2F57285.htm]
  • Australian Taxation Office fact sheet Trans-Tasman Imputation Overview [http://www.ato.gov.au/businesses/content.asp?doc=/content/33018.htm&pc=001/003/066/002/002&mnu=&mfp=&st=&cy=1]