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Unformatted text preview: Problem Set 5- Solutions 1. How does dividend imputation work? Why did the federal government bring in the franking credit system? The dividend imputation (franking) system allows credits for company tax paid to be passed to shareholders to allow then to lower the tax they would otherwise pay. The company tax paid is imputed to be received by the shareholder along with the dividends, and these tax credits are added to the shareholders income. Tax is calculated and the tax credits are used to reduce the tax liability of the shareholder, thus avoiding double taxation. Before this system was brought in, support for the share markets was limited due to the double taxation of dividend income. This double taxation also favoured companies that reinvested their profits rather than distributing them to shareholders and increased their share price in doing so. The implementation of the dividend imputation system has meant that institutional, high net worth and lower net worth investors receive an additional benefit from investing in Australian equities. This strong support has helped stabilize and grow the share market. 2. Why do you think that salary sacrifice has become very popular? There are a number of non-taxation reasons, including peoples concerns regarding having sufficient money to retire. From a taxation perspective, the following are some of the reasons why salary sacrifice can be attractive: Does not attract fringe benefit tax. Automatic deduction, can be increased, decreased or stopped at any time....
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- Three '11