Imputation System – What is it?

The simplified imputation system allows Australian and New Zealand corporate tax entities, which pay Australian tax, to pass on to their Australian members (shareholders) a credit for income tax paid on profits, when distributing those profits.

Although shareholders are taxed on the full amount of the profit represented by their dividend distribution, they are allowed credit for the tax already paid by the corporate entity.

This prevents double taxation, that is, the taxation of company profits when earned by a company, and again when a shareholder receives a dividend.

Example: How imputation works

Assumed shareholder is an individual taxpayer on the top personal tax rate

Without imputation With imputation
Company
Income earned $100.00 $100.00
Company tax (30%) $30.00 $30.00
Net profit after tax $70.00 $70.00
Individual shareholder
Dividend paid $70.00 $70.00
Franking credit $30.00
Taxable income $70.00 $100.00
Tax on taxable income (46.5%*) $32.55 $46.50
Credit for company tax $30.00
Tax payable $32.55 $16.50
Net distribution to shareholder $37.45 $53.50
Total tax paid by company and shareholder $62.55 $46.50
*Includes Medicare levy