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Let’s get the numbers right on imputation

[Managing Editor’s note: This is Part 1 in a series that Graham Horrocks has written due to “a miserable level of discussion and to relieve my frustration” relating to the Australian tax, dividend and superannuation system. Graham is an actuary and was my first financial adviser 30 years ago, when we spent most of the day talking about strategy and long-term structure, and nothing about picking fund managers or stocks.]


The Government proposal to lower the corporate tax rate in Australia has prompted a heated debate about the impact on shareholders. The widespread inaccuracy in reporting the consequences has prompted me to put together some figures and comments as background. For example, one prominent adviser/commentator recently wrote incorrectly that "at a 25% corporate tax rate, personal taxpayers would suffer because of their higher marginal tax rates and face additional tax bills on franked dividends." 

Income tax payable by an Australian investor receiving a franked dividend

The Australian system of full dividend imputation should be front and centre in any debate on the rate of company tax in Australia. Dividend imputation was introduced after a long campaign by business to avoid the double taxation of company dividends. Australian shareholders only pay tax on dividends once, at their own tax rate, but the company tax rate and the amount paid by the company is irrelevant to Australian shareholders.

Calculations in the table below are based on a company tax rate of 30% and tax rates for Australian shareholders of 47% and 34.5% (including Medicare Levy) for individuals, 15% for superannuation funds in accumulation phase (super funds) and zero for superannuation funds in pension phase (pension funds).

Shareholder tax rate and tax rate paid under dividend imputation

The company tax rate is irrelevant because regardless of the level, tax is subtracted from profits and then added back for investors as a franking credit. These figures can be recalculated with a lower tax rate of 25% (or any other figure) and it will reduce the company tax payable, increase the after-tax profit, increase the cash dividend and reduce the franking credit. But, the dividend after-tax received by the shareholder on the various tax rates will be exactly the same: $53 (47% tax rate), $65.50 (34.5% tax rate), $85 (15% tax rate) and $100 (tax free).

Company tax rate has no impact on the after-tax dividend

In each case, the total tax payable and hence the amount of the dividend after tax reflects the profit of the company before tax and the Australian shareholder’s tax rate only. The company tax rate has no impact on the amount of after-tax dividend received by an Australian shareholder.

Some additional comments:

  • The value of a company is the present value of the dividends which are expected to be earned in the future, after tax payable by the shareholder. Even when the company is sold, its value then will still be the present value of expected future after tax dividends. The amount of dividend received by an Australian shareholder after tax reflects the shareholder’s tax rate and is independent of the company tax rate, so the value of a company to an Australian shareholder is also independent of the company tax rate.

  • In many cases the after-tax position for an overseas shareholder is much the same as for an Australian shareholder. Tax rules in USA, UK, much of Europe and other countries, together with double taxation arrangements generally mean that any tax paid by the company in Australia is offset against tax payable overseas by the parent company. Thus, lower tax paid in Australia by a company will mean more tax paid overseas, i.e. a subsidy from Australian taxpayers to overseas countries – unless, of course, profits are passed through a tax haven on the way. Figures published recently suggest that the proposed reduction in the company tax rate in Australia for large companies would represent a huge subsidy from the Australian taxpayer to overseas countries, hardly in Australia’s best interest.

  • The proposed reduction in the company tax rate is expected to result in a significant cost to tax receipts received by the ATO. Some figures suggest that much of this cost comes from the subsidy from Australian taxpayers to overseas companies described above. Another component of the cost is likely to be retained (after-tax) profits within Australian companies where franking credits are retained rather than being distributed to shareholders. This is discussed in Part 2 next week.


Graham Horrocks is an actuary specialising in financial planning and superannuation, and a former General Manager, Research & Quality Assurance, with Ord Minnett. Since 1999, he has been an independent financial adviser. The article was reviewed by Geoff Walker, former Chief Actuary at the State Bank of New South Wales and winner of the 1989 JASSA Prize for published research on the implications of the then relatively-new dividend imputation system.


March 13, 2018

If franking credits were no longer rebatable and could be used only up to the amount of tax owing, then there may be a huge effect on the self managed superannuation industry. (As well as the devastating effect of many retiree couples losing a quarter to a third of their current incomes).

I have only done some preliminary calculations but many couples with SMSF's which mainly invest in dividend paying shares would be better off closing their funds and having the income in their own names. Their tax would be covered by the franking credit so they would still be tax free and they would save the cost of administration for their fund and the govt levy on their super fund. Most couples would be at least $2500 a year better off with these costs eliminated than they would be leaving the money in super.

There would also be a saving to their estate as the 15% tax on the untaxed part of their super would not be payable by their heirs. It would also simplify the administration of their estate, saving their heirs some further costs.

From the calculations I have done so far, this saving applies to super balances up to about $1.6m for a couple, where they have most of their super money invested in shares paying franked dividends and around $600k more in their own names, ie about $2.2m total with $200k of this in cash, $2m in shares.

This is an interesting aspect of the suggested changes.

SMSF Trustee
March 13, 2018

Looks like the numbers on imputation are about to change for zero tax paying people and organisations. On tax policy and economic grounds, Bill Shorten's proposal to remove the franking credit refund makes perfect sense. There's probably not much political damage either, though lots of people will complain. SMSF's in pension phase will not get their franking credit payments of about 0.5% of their equity investments; managed funds set up to take advantage of the generosity of Peter Costello when he introduced it will have to close; charities will be adversely affected. So there'll be a lot of noise in opposition to it.

But it's a reminder that no one should plan forever on a government policy remaining in place for ever. Enjoy such things while they last, but presume that if you're perceived to be well off, or receiving a benefit without any identified public policy objective being delivered by that benefit, the tax man will come after you at some point.

March 13, 2018

Agree SMSF Trustee. The imputation system is not at fault here. What you have eloquently described affects is a small portion of the population (which I am one) who have simply followed government policy at the time knowing full well that the day of reckoning will arrive when the new crop of pollies try and redress earlier give-aways. In the case of SMSFs in pension phase, you have basked in the legacy of Costello's 2007 plan to, among other things, apply a 0% tax on super fund earnings (including grossed up franked dividends) in pension mode. Those 2007 changes were an attempt to lure baby boomers approaching retirement to throw their hard earned into Australia's superannuation system and secure a further term in office for Coalition. Over the years, a lot of those incentives have been clawed back by successive governments and this is just another clawback. The motto: it is folly to believe that modern day tax reform means long term tax reform. What one government gives with one hand another takes with the other. Accept this premise and life will become a whole lot less stressful.

Geoff Walker
March 15, 2018

Just to clarify, Steve. Income on assets backing pension liabilities has always been tax free since the introduction of federal income tax in 1915 and remains so to this day, even after the recent imposition of the $1.6m cap. This treatment was akin to a trust not having to pay tax provided it distributes its taxable income. In this regard, up until 2007 the pension payments were taxable in the hands of the pensioner and it was this taxation that Costello removed.

March 11, 2018

If dividend imputation was introduced "to avoid the double taxation of company dividends"
why should Super Fund (Pension) which has a 0% tax rate receive a franking credit, as there is no double taxation of the dividend.

This is particularly relevant since Peter Costello made all super payments, including non-pension withdrawals, tax-free at age 60. This abolished the Keating system of including the taxable component of super pension payments assessable for personal income tax, with a 15% tax offset.

Just wondering.

Barry Lennon
March 11, 2018

Graham, Are you deliberately ignoring the fact that a lower company tax rate may result in higher salaries and wages rather than higher dividends for shareholders?

Surely this is what many think/hope will happen. You even have government ministers saying that this will happen as part of a strategy to increase wages.

This decision will be in the hands of the company - not the shareholders. And if it happens, it will require shareholders to find the money to pay the additional personal tax on investment income (after imputation credit rebate) from other investments. They may have to disinvest elsewhere.

This will certainly put a damper on investment.

Ross McClure
March 11, 2018

As you say Barry, "hope" is the crucial word. Empirical research into the impact of tax cuts on dividends, wages and tax cuts, such as those from the 2004 Job Creation Act in the U.S. under Bush, has failed to find any increase in either wages, jobs or investment. It has all gone to increased dividends. The exception was in Germany where their unions have a much larger influence on corporate decisions (represented on the BoD) and part of the tax cut went to increased wages.
In Australia, wages have stagnated despite increased profits. Why would further increasing after tax profits have any effect?

Barry Lennon
March 14, 2018


There is no question that if Shorten gets in at the next election, they will increase minimum wages.

I hope you are right but doubt that you will be.


March 10, 2018

Graham, I have been reading all the comments related to Graham Horrocks article.

There seems massive uncertainty as to the actual impact of changes in company tax rates either benefiting foreigners versus benefiting Australia.
There seems to be a view that reducing corporate taxes will only benefit foreigners; indeed the good socialists seem to be inferring corporate tax rates are virtually irrelevant and even should go up.
What I do know is that wherever you look around the world, lower corporate tax rates have had massive long term positive impacts on standards of living, employment , investment etc.
Just a few local examples- Singapore, Hong Kong, ew Zealand and the most important of all , the introduction of low company tax zones in coastal China which unleashed the modern China miracle.

Can somebody like Horrocks go through the maths of what happens when corporate tax rates change as regards local and foreign after tax returns.

Ross McClure
March 11, 2018

While you may have read all the comments, it's quite useful to start by reading the actual article. Graham has set out the impact of corporate tax on various Australian shareholders and shows that the rate of corporate tax is indeed irrelevant, and I doubt very much that he is a "good socialist". The benefit from tax cuts goes entirely to overseas shareholders/tax authorities. Even the Australian Treasury admits that, but argues that it is required to attract foreign direct investment.
As for your "few local examples" of the "massive long-term impacts" of tax cuts on the standard of living, Singapore is regarded as a tax haven (sorry, "marketing hub") and BHP is in dispute with the ATO over its transactions with its Singapore subsidiaries. New Zealand, like Australia, has dividend imputation (tax cuts are therefore irrelevant to local investors), and the boom in China has far more important determinants than the rate of tax.
It;s worth noting that the industry associations with a large representation of overseas firms: 42% of the member companies of the Business Council of Australia are 100% foreign-owned subsidiaries; Minerals Council (31%) and Medicines Aust (67%). No wonder they are arguing for a tax cut!!!

Mike Doherty
March 09, 2018

Pigs might fly.
The more likely result is the foreign company will launder their profits through the tax havens, not pay any increase in wages, will not hire any more staff, will lay off staff due to automation, will then increase the net wealth of US shareholders, Thanks very much you Aussies.

March 09, 2018

a company tax reduction will affect dividend imputation - but not by much ( remember dividend imputation was implemented to avoid double tax so investors are way ahead already).
My biggest issue is why do we need a reduced company tax rate - given most companies do not pay the full current rate ( and some pay no tax ) with the myriad deductions .

My estimate is that companies will keep the increased profit, not pay more dividends and certainly not increase wages. So the value of investing in ASX listed Australian companies will evaporate and push more investors like me to invest offshore.

March 08, 2018

Australian retirees would get less total income though would they not with say 25% franking credits rather than 30%. If their taxable income is low enough (as half income tax-free pension and half share income) their refund of franking credits will be lower. And the Super Pension will also have less credits refunded to the Pension Account.

So a double hit on income - would that be fair to say?

March 09, 2018


It is true that a reduction in the corporate tax rate will result in a lower imputation credit.
However, by the same token, a lower corporate tax rate will result in higher after tax profits for the company. If the company maintains its current dividend payout ratio, then the amount of cash dividend will rise in proportion to the increase in after-tax profits. The higher cash dividend compensates for the lower franking credit. The lowering of the corporate tax rate is not an event that normally generates a change in the dividend payout ratio of a company.


Garry B.
March 08, 2018

Lowering listed companies tax rate is a straight out subsidy to foreigners. Why would our politicians favour the financial interests of non-citizens, who are not voters, over those of Australians? Who are they working for? If the alleged desperate need for foreign capital were true, then banks might raise their cash rates above the current miserly rates, and put the capital of Australians at work, doing something other than driving housing prices sky high. Politicians should unambiguously encourage Australians to invest and grow their own economy, rather than pander to those who have little interest in the long term future of our country. Do something!

March 08, 2018

Agree with the comments regarding the explicit assumption that companies will raise their payouts commensurately with the cut in tax. This should have spelled out in the initial analysis as it would have made the calculations and conclusions easier to understand.

March 08, 2018

A lower corporate tax rate will clearly enable a company to retain more after tax income for reinvestment and improve the compounding growth in returns on capital employed.

Seems pretty obvious

Graham Horrocks
March 08, 2018

Thanks, Peter. I will reply in detail with a piece on retention of income in a public company next week.

Ross McClure
March 11, 2018

Hi Peter, you make an assumption that the reinvestment of retained earnings increases future returns. This overlooks the investment by CEO's in "trophy" or pet projects that can have zero or sometimes negative net returns. Dividend imputation has incentives for companies to distribute earnings in order to distribute the associated tax credits. This forces the management of these companies to go to the capital markets with an investment proposal, leading to scrutiny by investors and their advisors. This is regarded as a disciplining mechanism that limits poor investment choices.

March 08, 2018

Yes Graham thats right but the big implicit assumption (not in your control) is the company increases the dividend via the tax cut ie: from 70 to 75 (which is a continuation of a 100% payout ratio in this example) If it doesn't increase the dividend and maintains the old one / amount (70) the shareholder is worse off net. A lot of companies are arguing they will invest the surplus (tax) cash thus the dividend increase may also not flow. Any way just a thought.

March 08, 2018

If the company holds on to the cash not paid as tax, then its balance sheet will improve (it has more assets than it would have had otherwise). Its share price should improve to the same extent. So, the shareholder gets a lower dividend but a higher share price to compensate. BTW: this is what happens whenever a company decides not to pay the whole profit out as a dividend, regardless of the company tax rate.

March 08, 2018


Shareholders need to look at the dividend in after tax cash terms. I would argue that a company does not have to alter its payout ratio as the shareholder will be no worse off (in after tax terms) even with a reduction in the company tax rate. Yes, it is true that the franking credit will be lower but that is only half the equation. You are forgetting that the amount of cash dividend will be higher (assuming that the company maintains its existing payout ratio). The logic only falls down if the company were to cut its payout ratio which I would argue is not a flaw of the imputation system.


March 08, 2018

I agree with Dan - I have some retained profits where from memory I have paid 34 and 36 cents in years gone by. So I end up with heaps of excess franking credits that it seems there is no way to access simply. (Anyone with *legal* ideas please comment below..)

re the article I agree lowering company tax rates is an enormous subsidy to overseas shareholders or their governments. Ideally company tax rates should be set at the highest marginal income tax rate (which could be appropriately reduced so it was revenue neutral). Why should foreign shareholders pay less tax on a company's earnings than locals?

While Graham is correct about the total tax paid not changing, this assumes that the company chooses to increase the dividend. If a company was paying say $1 a share dividend fully franked and doesn't increase the dividend when the company tax rate drops, then the taxpayer does need to pay more tax than before due to the lowered franking credit. There is no guarantee that companies will pay out more in dividends and not choose to simply retain more earnings.

John W
March 09, 2018

Geoff, yes I've also seen tax paid at higher Company rates & excess franking credits that can't be used.

The more recent situation was a listed company that paid a dividend with 30% franking, then rules were retrospectively changed.
Shareholders were advised of the lower franking, their net after tax dividend is lower and the company franking account has excess credits that can't be used.

Ross McClure
March 11, 2018

You could always put some funds into a tax preferred investment, such as R&D which lowers your tax payments and therefore lower tax credits, but does not reduce your profit.

March 08, 2018

I take issue with the unattributed (and unsubstantiated) reference in this article of "Figures published recently" that lower Australian company tax rates represent a "huge subsidy" and "hardly in Australia's best interest". What is the purpose of a proposed tax cut? Please correct me if I'm wrong, but my understanding is that the objective of a tax cut is to assist in Australia continuing to remain competitive in attracting foreign investment capital. If we maintain current company tax rates, will foreign investment decrease over time resulting in reduced tax receipts? Does foreign investment, in effect, "subside" Australian taxation receipts? Instead of providing a rigorous cost/benefit analysis related to a reduction in the company tax rate, Horrocks has (disappointingly) referred to unsubstantiated suggestions by others in this article that are similar in vein to those written by others in relation to dividend imputation.

Tony Reardon
March 08, 2018

Issues can arise when the tax rates are changed. If the company has paid tax at one rate (30%) and the dividend imputation calculation for the individual taxpayer is done at a lower level (27.5%), then there is a 2.5% difference which stays with the tax man.

March 08, 2018

Unfortunately does not tell the whole story, needs to compare effect of different levels of company tax on income.

March 08, 2018

Tax does not affect income. It comes after income has been earned. The amount of tax paid on company profit (income minus expenses) depends on the marginal tax rate of the shareholder.

Company tax is really just a way of the ATO saying 'we will take 30% now and hold on to it until the shareholder lodges their tax return, at which stage we will either give some back or ask for more, depending on whether their tax rate is below or above 30%.'

March 08, 2018

Great article. Its a shame that leading CEOs and the BCA are not being upfront in the company tax debate:

- just about all of the benefit from a cut in the company tax rate will go to foreign investors (this may or may not be a good/bad thing)
- the focus should be on effective tax rates, not headline as it ignores the significant differences between countries in deductions and rebates

March 09, 2018

Dan, you are correct. There are recent examples where dividend statements had to be reissued because the rules were retrospectively changed, and shareholders were, in fact, worse off after the tax "reduction".

March 08, 2018

I don’t agree with his article on imputation credits if you own the business yourself and you have retained profits that you have paid 30% tax on!! You will always be worse off by 2.5% of the cash dividend – so if you have a bucket company with $5m in it, you will be down 125k at some point in your life.

No different for blue chips I agree but for a small family-owned business where the tax is your money he is wrong.

March 08, 2018

Dan, my understanding is that if the company paid tax at 30% on historical profits before the rate reduced, the shareholder (owner) still gets the benefit of the franking credits applicable at that higher rate. It is only for the profits taxed at the new lower rate that the franking credits would reduce so it does not change the article's illustration.

Graham Horrocks
March 08, 2018

The article is designed around listed public companies and the world of private companies is different. They also have special tax provisions on retirement and for selling the business.

March 08, 2018

Dan, Yes I think Felix is right. You are still able to frank dividends at the maximum rate (30%). However, as you start paying tax on your small company profits at 27.5% whilst still enjoying franked dividends at 30%, the franking credit bucket will soon start to shrink. If the corporate rate ever fell to match the small business rate (causing the maximum franking rate to fall as well) those credits you built up under a previous tax regime (30%) are not lost. The franking account is in simple terms the balance of the tax paid by the company which can be used to pay a franked dividend. The integrity of the system will remain intact in spit of a cut in the corporate tax rate; that is, to fund a credit for the tax paid on company profits irrespective of the type of business.

March 07, 2018

More than half of the liquid shareholding of ASX stocks (especially big caps which are the ones that pay dividends) is by foreigners who don’t get franking credits. So higher tax rate directly reduces returns and makes ASX stocks less attractive. Reduced foreign buying means lower share prices.

· But structurally lower foreign shareholding means a lower dollar – which benefits exporter revenues and profits, etc – so the effects are mixed.

· Higher tax collections by government mostly ends up recycled in government spending – which ends up directly or indirectly in company revenues, margins, profits and dividends. Even tax revenues spent on reducing government debt puts money back in the hands of the bond holders who – you guessed it – spend it (ending up in company revenues, etc) or pay off debt of their own (ditto) etc.

So the implications of changing company tax rates are highly complex.


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