Dividend Imputation in Australia – Part 5
This fifth part of dividend imputation in Australia discusses a previous study on the issue. Remarkably, this part reviews a paper by Jugurnath et al. (2007). Jugurnath et al. (2007) investigate the influence of tax on dividends on corporate investment. Jugurnath et al. (2007) also employ the U.S. Tax Reform Act 1986 (TRA 1986) to test the issue. Consequently, they disseminate a comparative study between the classical system and imputation system of dividend taxation in the United States and Australia.
In the classical taxation system, distributed corporate earnings are taxed twice. The first tax is levied in the hand of the company that distributes the income, and the second tax is charged in the hand of investors when they receive their investment returns. This condition may lead to an increase in corporate capital outflow, thereby decreasing capital investment by the corporation. They believe in a positive association between the amount of tax credit attached in dividend and the amount paid. This may indicate that tax credit increases dividend payout.
Consequently, corporate passes the tax credit to shareholders. They find that the dividend imputation, which results in a tax credit, may mitigate the distortions caused by the traditional taxation system. They find that the imputation credit may stimulate corporate capital investment. The TRA 1986 finds that its effect on corporate investment is more pronounced for U.S. firms having a net operating loss.
- Bhavish Jugurnath & Mark Stewart & Robert Brooks, 2008. “Dividend taxation and corporate investment: a comparative study between the classical system and imputation system of dividend taxation in the United States and Australia,” Review of Quantitative Finance and Accounting, Springer, vol. 31(2), pages 209-224, August.
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