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

The following are incorrect regarding taxation in Australia

a)The imputation tax system allows double taxation of dividends - Incorrect

Reason:The only obective of the dividend imputation tax system is to collect tax on distributed income at the shareholder's tax rate in order to avoid double taxation of company profits once at the corporate level and again on distribution as dividend to shareholders.Here the tax paid by the company is attributed or imputed to the shareholders by way of tax credit to reduce the income tax payable on distribution.

b)Franking Credits can be used to offset the investor's other sources of taxable income - Incorrect

Reason:Franking credits do not offset the investor's other sources of taxable income rather it offsets the tax liability on the income.Also it does not only offsets income tax liabilities of only other sources income ie dividends rather all forms of taxable income.