Explain the Australian dividend imputation credit system and how it applies in Australia.
(a) Bradley hates taking risk with his money; “I hate shares and property, I know a lot of people who have lost
money in those investments”. As a result he will only consider bank guaranteed investments. Bank guaranteed investments are returning 1%. Bradley has a marginal tax rate of 32.5% and pays medicare levy of 2%.
- Assuming he pays tax at 32.5% plus medicare levy, on the income from his investment, is he preserving the real dollar value of his investment if inflation is 2.5% per annum? Show your workings to justify your answer. (2.5 marks)
- When considering your calculations, how would you explain the benefits of risk to Bradley? (2.5 marks)
(b) Explain the Australian dividend imputation credit system and how it applies in Australia. Include an analysis of how the receipt of franking credits will result in differing returns for Australian resident and international investors. (10 marks)