The Australian dividend “grossing up” rules create an extra cashflow burden for a shareholder, when one recognises that the income tax of the shareholder is being calculated on profits that are never received by the shareholder. In effect, a shareholder receiving a dividend (after tax) of 70 cents out of a company profit of $1 is forced to pay further income tax at the taxpayer’s marginal tax rate, not on the dividend of 70 cents but on the whole of the company profits (ie. $1). Even allowing for a 30% company tax rate, in Australia, the fact that the individual taxpayer may already be paying tax at the top marginal tax rate of 48.5% means the grossing up of the dividend has resulted in the individual taxpayer paying 18.5% out of the 70 cents dividend, leaving 51.5 cents after tax, but that 18.5 cents tax constitutes a tax ratio of more than 26.42% of the 70 cent dividend that has been received.
For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.
