Question

Assume a company has taxable income (EBT) of $1.00 per share. Assume also that the corporate tax rate is 30% on profits and the rich doctor/lawyer/etc. investor’s individual tax rate is 50%. Assume the company pays out all its net income as a fully-franked dividend to the investors.

Calculate the after-tax dividend per share that the investor could put towards her yearly smashed avocado budget under both A) a classical taxation system and B) a dividend imputation system.

Answer 1

Under Classical Taxation System After Tax Dividend per share is Calculated by using the formula=

Net profit after tax divided by Total number of shares.

As per the question EBT is 1 per share and Tax rate is 30% so after tax dividend per share will be (1-30%) which will be equal to 0.7 after tax dividend per share. As in the question it has been mentioned that Company pas all its income as a. fully franked dividend to the investors, So this means that the company does not retain any profit and it distributes all the income earned as dividend.

Part 2 Dividend Imputation System

In fully franked dividend the investor will recieve 100% of the tax paid b the company as credit. So here as the investor is receiving (1-30%) which is 0.7 dividend per share from a company so their full frank credit will be 0.3 for a grossed up dividend of 1.

Here fully franked dividend the investor will get credit of 0.3 but had it not been fully franked dividend he would end up paying taxes on entire 1 (0.7+0.3), So investor would hav paid 50% on 1 which is 0.5 but since it is fully franked the company has already paid taxes of worth 0.3 per share so the investor will have to pay only the difference 0.5-0.3 which is equal to 0.2 $ per share.