Quite Frankly, It's a Simplified Imputation System: It's Not Often That a Promise of a Simplified Tax Law Is Achievable, but the New Dividend Regime Achieves Pretty Much Just That. (Tax and Law Australia)

By Rigney, Harry | Journal of Banking and Financial Services, December 2002 | Go to article overview

Quite Frankly, It's a Simplified Imputation System: It's Not Often That a Promise of a Simplified Tax Law Is Achievable, but the New Dividend Regime Achieves Pretty Much Just That. (Tax and Law Australia)


Rigney, Harry, Journal of Banking and Financial Services


In one of the most significant tax changes since dividend imputation started in 1987, new arrangements for dividends and income tax started on July 1 this year.

The reasons for introduction of the new rules have been cited as such:

* compliance cost savings from simplification;

* increased flexibility in the method by which companies frank distributions;

* consistency of treatment across entities receiving franked dividends;

* improved clarity in the law; and

* introduction of several anti-avoidance measures.

These measures were promised as part of the unified entity measures announced in September 1999. Some parts of those proposals have been removed from the immediate agenda, in particular the move to treat trusts for tax as companies. However the new imputation rules have emerged in law in a form broadly consistent with the recommendations made by the so-called Ralph review of business taxation.

Some consequential elements of the overall imputation package are yet to be introduced to Parliament, mainly dealing with:

* venture capital;

* life insurance companies;

* so-called share capital `tainting', relating to the source of profits which fund dividends;

* the holding period and related payments rules which provide eligibility to access franking credits; and

* a number of transitional and machinery provisions.

Dividend franking policy

The policy thrust of the dividend franking rules arises from the separation for tax purposes of certain entities from the members. Companies, corporate unit trusts, public trading trusts and corporate limited partnerships are taxpayers in their own right. However the holders of membership interests in those entities are also taxpayers.

The dividend imputation system prevents double taxation of the distributed income of those entities in the hands of their members. Credit for the income tax paid by an entity will generally be passed on, or imputed, to members of the entity, to the extent that those members receive distributions of profit derived by the entity.

A dividend which carries such credit is said to be franked, and the tax credits that can be imputed to members are recorded as franking credits in the entity's franking account.

The franking account is built up not only from credits arising from tax paid by the entity, but also from credits passed on to the entity for underlying tax paid by other entities in their distribution of profit.

On receipt of a franked dividend, a member may apply the attached imputation credit to reduce income tax by way of franking rebate. Where imputation credits exceed tax payable by resident individuals, superannuation entities and certain other classes of member then the excess imputation credits may be accessed as a tax refund.

Anti-avoidance changes

In changing the mechanics of dividend franking, the Federal Government has attempted to ensure that:

* the imputation system is not used to give the benefit of income tax paid by a corporate tax entity to members who do not have a sufficient economic interest in the entity;

* the imputation system is not used to prefer some members over others when passing on the benefits of having paid income tax; and

* the membership of the corporate tax entity is not manipulated to create either of the above outcomes.

Key changes

Against the backdrop of those anti-avoidance objects, the new measures maintain the policy thrust but change the way dividend franking works, in terms of simplification, flexibility and consistency.

Simplification is an attribute addressed by changing the maintenance of an entity's franking account to a tax-paid basis, and by alignment of the entity's franking year with its income year.

Until 1 July 2002, the franking account recorded taxed income, or the amount of after-tax profit available for distribution. …

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Quite Frankly, It's a Simplified Imputation System: It's Not Often That a Promise of a Simplified Tax Law Is Achievable, but the New Dividend Regime Achieves Pretty Much Just That. (Tax and Law Australia)
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