when talk about the effective tax rate under imputation system, here what is imputation system? Thanks.
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When the only tax on the dividend is the individual’s own tax rate. The dividends are taxed based only on the individual’s tax bracket compared to the split rate and double tax system where the dividends are taxed at the corporate level as well.
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When earnings are returned to shareholders they are taxed twice - once at the corporate level, and then again when the shareholders receive the dividends and pay personal income tax. Imputation provides a tax credit along with dividends which effectively returns to the shareholder the corporate tax paid on the dividends. As a result, the shareholder only ends up paying tax on company earnings at their own personal income tax rate.
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Refer CFA books, corporate finance, divident policy.
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