You will be aware that a tax is paid by a company on it's income.

Before the introduction of imputation, taxpayers who received dividends from companies were really being taxed twice on the same income.

Think about it. The company pays tax on income it derives, and then pays out what is left of that income to the shareholders as dividends.

The shareholder then paid tax on the dividend income - representing the income of the company upon which tax had already been paid.

Franked dividends - the dividends paid by companies which pay company tax

Under the imputation system, which applies to dividends paid after 1/7/87, the taxpayer is allowed a rebate against dividend income, which represents the amount of company tax paid by the company paying the dividend.

The rebate will only be allowed against dividends paid by companies which have paid Australian company tax - these are known as franked dividends.

Under section 160 AQH, when a resident company pays a frankable dividend ...

(That is, one paid out of profits on which company tax has been paid) ...

It must give the shareholder a statement showing

(the sum of these two amounts is the total amount of dividend received)

It will also include other amounts - can you guess what they might be?

If you said, 'the franked dividends received by the company', well done!

If you are interested you can see a list of all the amounts that can increase and decrease a company's franking credit at paragraph 3.625 CCH Master Tax Guide.

That all makes sense - since that is the total amount of dividends received.

Section 160 AQT (1) requires an amount ascertained by the formula...

In other words ... For the 1998 income year and later dividends, the applicable tax rate is 36% so the multiplier will be ...

So you multiply your franked dividend by 36/64 to get you imputation credit

So the taxpayer is worse off than he was before - he is paying tax on more than he received in dividends ...

Section 160 AQU allows a rebate equal to the franking rebate where an amount was included in income section 160 AQT - the section we just learned about.

Let's take the case of a taxpayer on the top marginal tax rate, who receives a totally franked dividend of $100.

So, for the taxpayer in the top tax bracket, on $17 tax is paid on the dividend income received. It is even better for the taxpayer in a lower tax bracket. If you work through the example above for a taxpayer on the 20% rate, you will observe that the rebate allowed will be greater than the tax attributable to the dividend received. In other words, he will be receiving a rebate in respect of company tax paid by the company paying the dividend, which he can apply to tax payable on other forms of income

Section 160 AD sets a maximum amount for the total of all rebates. It is the total tax payable on an assessment.

So, the taxpayer can not receive a refund in respect of imputation credits not required to offset his own tax. Moreover, such credits can not be offset against medicare levy

Section 160 AQW deals with the case of partnerships and trusts ...

It talks about the section 160 AQT amount - that is the amount of imputation that is included in income.

This imputation credit is included the trust or partnership amounts.

In other words, the partnership is deemed to have derived the total of the franked amounts, the unfranked amounts and the imputation credits.

So, the partner must return his share of this amount as assessable income.

But ... Section 160 AQZ allows a rebate in the partner's assessment.

This rebate will be a proportion of the total imputation credit included in the partnership income.

No prizes for guessing that this proportion is the same as the proportion of the total partnership income received by the partner.

Let's put some figures to that to illustrate what we mean ...

Let's say the partner receives 50% of the partnership income

That means he is also entitled to 50% of the imputation credit - the section 160 AQT amount

Section 160 AQX and AQY deal with trustees and beneficiaries

Section 160 AQY allows a rebate against tax payable by a trustee when trust income has not been distributed.

Section 160 AQX allows a rebate against the tax payable by a beneficiary on his taxable income equal to the potential rebate amount in relation to the trust amount. Once again let's illustrate that with figures ...

Say the beneficiary receives a distribution of one third of the trust income

Remember, rebates can not exceed the tax payable, so if the trust had expenses of $20,000 a loss of $5000 would have been incurred

. Where a non-resident receives dividends these are usually subject to dividend withholding tax.

If the dividends have been fully franked, they will not be subject towithholding tax. This also applies to non-resident partners and beneficiaries