Question

An Australian shareholder receives a 79% partly-franked dividend of $13.68 thousand from OzCpy, with a marginal tax rate of 45% and exemption from the Medicare levy. What is the income tax payable by this investor on the partly-franked dividend?

A) $3974.82
B) $3608.59
C) $4553.49
D) $4162.63

Answer 1

The income tax payable on the partly-franked dividend is approximately $4.156 thousand or $4162.63 after considering the franking credits.

Step-by-step explanation:

To calculate the income tax payable on a partly-franked dividend, we must first understand how franking credits work. With a partly-franked dividend, only a portion of the tax has already been paid by the company. The dividend received by the shareholder has both a franked (tax-paid) and an unfranked (tax-not-paid) component.

Let's break down the calculation:

1. The gross-up dividend is $13.68 thousand times the reciprocal of 79% (the franking level), therefore, the full dividend before corporate tax would have been approximately $17.316 thousand.
2. The franking credit is the gross-up dividend minus the cash dividend, which is approximately $3.636 thousand.
3. Adding the franking credit to the cash dividend gives the taxable dividend income, which is approximately $17.316 thousand.
4. The tax on the taxable dividend is 45% (the marginal tax rate) of $17.316 thousand, which is approximately $7.792 thousand.
5. The franking credit can be used to offset the income tax payable, so subtract the $3.636 thousand from the $7.792 thousand, which leaves approximately $4.156 thousand.

The income tax payable by the Australian shareholder on the partly-franked dividend is approximately $4.156 thousand or option D) $4162.63.