Question

Required: Advise Jake of the tax payable due to the receipt of the dividends.

Jake receives the following dividends on 1 August 2020:

• $8000, fully franked from ABC Ltd.
• $3000, 50% franked, from DEF Ltd.

Jakes is on the top (45%) marginal tax rate. Ignoring Medicare Levy, calculate the impact of the dividends on Jake’s tax liability.

subject principles of income tax

Answer 1

SoL:

Dividends are paid out of profits which have already been subject to Australian company tax which is currently 30%.This means that shareholders receive a rebate for the tax paid by the company on profits distributed as dividends.

These dividends are described as being Franked.Franking credits have a franking credit attached to them which represents the amount of tax the company has already paid.Franking credits are also known as Imputation Credits.

In the represent case 1

Jake received $8000 franked dividends from ABC Ltd.It means dividend received by Jake is a net dividend on which tax is already paid by company @30%.

For claculating gross amount of dividend = Dividend Received / (1-Company Tax Rate)

= $8000 / (1-30%) = $11428

Franking Credit = Gross Dividend * Company Tax Rate = $11428*30% = $3428

This Franking credit will be allowed as rebate to the Jake . By this method it avoids double taxation.

In the present case Marginal tax rate@45% of Jake is higher than company tax rate @30%,Jake has to pay additional tax.

In the present case 2

Jake received $3000 half franked dividend

Gross Amount = 50%*$3000 / (1-0.30) = $2143

Franking Credit = $2143*30% = $643

Computation of Additional Tax to be paid by Jake

Gross Dividend ( $11428 + $2143 + $1500) = $15071

Tax Amount(A) ($15071*45%) = $6782

Franking Credit(B) ($3428 + $643) = $4071

Net Tax Liability = $2711