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Corporate Income Taxes

  1. Accumulated Earnings Tax
  2. Business Tax Credits
  3. Consolidated Tax Return
  4. Dividend Exclusion
  5. Excess Profits Tax
  6. Indian Employment Credit
  7. Dividend Imputation
  8. LIHTC

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Dividend Imputation: Definition & How It Works

Updated: February 6, 2023

Under Australian tax law, dividend imputation is a system that credits taxes paid by a company to shareholders. This works when they receive dividends from the company.

This system came about in 1987. It creates a level playing field between Australian and foreign companies operating in Australia.

If you’d like to learn more about dividend imputation and how it works, read on.

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    • Dividend imputation is a system that credits the taxes paid by a company to shareholders when they receive dividends from the company.
    • Under dividend imputation, when a company pays tax on its profits, it becomes what is called a “franked” dividend. This means that the company can attach a tax credit to the dividend.
    • The shareholder uses this imputation with tax credit to offset any tax that they may owe on the dividend. This system serves to create a level playing field between Australian and foreign companies.
    • Currently, the countries of Australia, New Zealand, and Germany have some form of dividend imputation in place.

    What is Dividend Imputation?

    Dividend imputation is the process whereby a corporate tax applies to the gross dividend amount paid to shareholders. The tax is then “imputed” or attributed to the shareholders by way of reducing the amount of tax they owe on their other income, such as wages or interest.

    Dividend income imputation means that the company must attribute (or “impute”) a tax value to the dividends. It’s done so the shareholders can account for them appropriately when they file their personal income tax returns.

    Due to the effects of dividend imputation, corporations must pay an additional amount of corporate taxes. Corporations in Australia can pay dividends with or without dividend imputation. Shareholders then choose which type of dividend they want to receive. It’s when they receive their dividends from their stock investments.

    Companies record this on their dividend statement. This ensures accurate recording of annual income and taxable income.

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    How Does Dividend Imputation Work?

    When a company declares a dividend, it has to pay a certain amount of tax on that dividend. This “tax on the dividend” is different from the company tax that companies have to pay on their tax profits.

    The tax on the dividend gets paid by the company to the government and is the same amount of tax that would get paid on the same amount of salary to the employee.

    It is a “tax on the dividend” because it is the amount of tax that the government receives when the company pays its dividends.

    The company also gives a “tax credit” to each of its shareholders when it pays a dividend. The tax credit is like a “refund” of part of the tax that the company has paid on the dividend. This is partial imputation.

    List Of Countries Having Dividend Imputation

    Below are the countries that have adopted dividend imputation systems:

    • Australia
    • New Zealand
    • Germany
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    Impact Of Dividend Imputation

    One issue which is often raised with respect to dividend imputation is the effect it has on investment decisions. 

    Proponents of imputation argue that it encourages investment. i.e., by lowering the effective rate of corporate taxation, thereby lowering the after-tax capital cost for firms.

    The argument behind dividend imputation is that it creates a level playing field for Australia and foreign companies.

    This, in turn, leads to increased investment and economic growth. Opponents of dividend imputation argue that it penalizes shareholders who are not earning the average wage. It forces them to pay more taxes on their investment income. And it can especially hurt retirees or are those living on a fixed income.

    It’s worth noting that the latter argument is somewhat contradictory. The goal is to improve the financial situation of retirees. So dividend imputation would appear to be counterproductive. It increases the amount of taxes retirees would have to pay on their investment income.


    Dividend imputation is a system that allows for the taxation of company profits to be passed on to shareholders in the form of a tax credit.

    The impacts of dividend imputation have been the subject of debate in Australia. Some argue that it has led to an increase in investment in Australian companies. Others argue that it has led to a decrease in tax revenue for the government.

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    FAQs on Dividend Imputation

    How does dividend imputation work in Australia?

    When a company pays income for shareholders, it includes an imputation credit. This is a tax credit that can be used to offset the tax that the shareholder would otherwise have to pay on the dividend.

    The imputation credit is equal to the amount of tax that the company has already paid on its profits. So, if a company has already paid 30% tax on its profits, the imputation credit will be 30%.

    The shareholder can use the imputation credit to reduce their tax bill. If they have already paid tax on their income (at a higher rate than the company), they can claim a refund for the difference.

    What is imputation credit on dividends?

    An imputation credit is a tax credit attached to a dividend when it’s paid by a company. Shareholders can use this tax credit to offset any tax that they may owe on the dividend.

    What is a fully franked dividend?

    A fully franked dividend is a dividend that’s taxed at the corporate tax rate and has a tax credit attached to it.

    Can imputation credits be carried forward?

    Yes, imputation credits can carry forward and offset tax on future dividends.

    What is the difference between a franked and an unfranked dividend?

    Franked dividends are taxed dividends; taxed at the corporate tax level. Attached to it is a tax credit. An unfranked dividend is a dividend that has not been taxed at the company tax rate and does not have a tax credit attached to it.


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