“How does the imputation system of dividend payment remove the double taxation of dividends?”
[GJF, Review Question 12-12 (p. 542)] (5 marks)
Suppose an individual subject to a 30 per cent marginal rate of income tax has 2,500 shares in a company that is paying a partially franked dividend of 40 cents per share, with a franking ratio of 0.70 (i.e. 70%). The individual is a resident for taxation purposes. If the company tax rate is 30 per cent:
(a) What tax credit can the individual claim due to the partially franked dividends?
(b) What is the tax on the taxable income (i.e. the grossed up dividend) due to the partially franked dividend?
(c) What tax, if any, is payable by the individual out of the cash dividend payment received?