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.

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.

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

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 are interested you can see a list of all the amounts that can increase and decrease a company's franking credit at paras 3.630 & 3.640 CCH Master Tax Guide.

The taxpayer must include in his assessable income the total of the

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

But the total amount of

must also be included in income - this represents money that has not been received by the taxpayer - it is the company tax paid by the company ...

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

In other words ... 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, no 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

So, the taxpayer can not receive a refund in respect of imputation credits not required to offset his own tax.

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

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

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

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 ...

Let's 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 $4000 a loss of $1000 would have been incurred

The trust has a net loss so the potential rebate exceeds the tax payable therefore no rebate allowed

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 to withholding tax. This also applies to non resident partners and beneficiaries