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Assume OzCpy is an Australian firm whose shares trade on the ASX. The firm earn part of its domestically income in Australia and and part of its income overseas, where it is required to pay tax to the foreign governments where it operates. Currently, the Australian corporate tax rate is 30% and the Medicare levy is 2%. OzCpy provides dividend imputation to Australian-resident shareholders from its Australian tax paid.Assume that OzCpy pays a 88% partly-franked dividend of $13.4 thousand to an Australian shareholder who has a marginal tax rate of 45% and who is exempt from paying the Medicare levy.  Compute the income tax payable by this investor on the partly-franked dividend.

Question

Assume OzCpy is an Australian firm whose shares trade on the ASX. The firm earn part of its domestically income in Australia and and part of its income overseas, where it is required to pay tax to the foreign governments where it operates. Currently, the Australian corporate tax rate is 30% and the Medicare levy is 2%. OzCpy provides dividend imputation to Australian-resident shareholders from its Australian tax paid.Assume that OzCpy pays a 88% partly-franked dividend of $13.4 thousand to an Australian shareholder who has a marginal tax rate of 45% and who is exempt from paying the Medicare levy.  Compute the income tax payable by this investor on the partly-franked dividend.

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Solution

To calculate the income tax payable by the investor on the partly-franked dividend, we need to follow these steps:

  1. Determine the grossed-up dividend: This is the total dividend before corporate tax was deducted. Since the dividend is 88% franked, it means that 88% of the corporate tax has been paid on it. So, we can calculate the grossed-up dividend as follows:

    Grossed-up dividend = Dividend / (1 - Corporate tax rate * Franking level) Grossed-up dividend = 13.4thousand/(1−0.30∗0.88)Grossed−updividend=13.4 thousand / (1 - 0.30 * 0.88) Grossed-up dividend = 15.7 thousand

  2. Calculate the franking credit: This is the amount of tax the company has already paid on the dividend. It is calculated as follows:

    Franking credit = Grossed-up dividend * Corporate tax rate * Franking level Franking credit = 15.7thousand∗0.30∗0.88Frankingcredit=15.7 thousand * 0.30 * 0.88 Franking credit = 4.1 thousand

  3. Calculate the gross income: This is the sum of the grossed-up dividend and the franking credit.

    Gross income = Grossed-up dividend + Franking credit Gross income = 15.7thousand+15.7 thousand + 4.1 thousand Gross income = $19.8 thousand

  4. Calculate the tax payable: This is the gross income multiplied by the investor's marginal tax rate.

    Tax payable = Gross income * Marginal tax rate Tax payable = 19.8thousand∗0.45Taxpayable=19.8 thousand * 0.45 Tax payable = 8.91 thousand

  5. Subtract the franking credit from the tax payable to get the final tax payable by the investor.

    Final tax payable = Tax payable - Franking credit Final tax payable = 8.91thousand−8.91 thousand - 4.1 thousand Final tax payable = $4.81 thousand

So, the income tax payable by the investor on the partly-franked dividend is $4.81 thousand.

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