How to best handle Imputation Credit (Australia); Tax related

[David Cousens]

Michael,

 

There is a Wikipedia article on the Tax imputation system which gives a
fairly clear description of the operation of the system at

http://en.wikipedia.org/wiki/Dividend_imputation particularly the section
headed  Operation an extract of which is given below

 

"An eligible shareholder receiving a franked dividend declares the cash
amount plus the franking credit as income, and is credited with the franking
credit against their final tax bill. The effect is as if the tax office
reversed the company tax by giving back the $0.30 to the shareholder and had
them treat the original $1.00 of profit as income, in the shareholder's
hands, like the company was merely a conduit."

 

The most logical way to handle it would be to create a Tax Credit Asset
account in which to accumulate your imputation credits. If a dividend is
paid with an amount FA (franked amount) and an amount UFA (unfranked amount)
and an imputation credit amount IC then you would credit your Share Income
account with an amount = FA +IC +UFA  and you would debit an amount FA + UFA
to your bank account (i.e. the cheque you put into it) and you would also
debit the amount IC to the Tax Credits asset account.  See Screenshot(1).png
attached for example.

 

At the end of the financial year you would declare the Share Income in your
taxable income to assess your taxable income.  You would then claim the
total of your Tax Credit amounts as a deduction from  the tax calculated on
your total  taxable income.

 

i.e.   Tax owable to ATO = Tax calculated on taxable income - Tax Credits
(sum of imputation credits).  If this is negative you will get a refund of
the excess of your tax credits over the Tax payable on your taxable income
and alas if it is positive you pay the difference to the ATO.  The sum of
your imputation credits is a tax offset.

 

If you had a Tax Liability Account against which you recorded your tax
calculated on your taxable income and a corresponding Tax expense account
which records your tax  then you could close the Tax Credits account to it
at the end of the financial year i.e. you credit the Tax Credit asset
account by the amount in it and debit the Tax Liability Account by that
amount.  The resulting balance in your Tax Liability account is what you owe
the ATO . Finally when you pay the ATO you credit your bank account by any
amount you have to pay the ATO ( or debit your bank account by the amount of
the refund) and debit the Tax Liability account by the refund amount. At
this point your Tax Credit account and Tax liability account should both
have zero balances.  

 

If you then close your income and expense accounts to equity you will record
your net increase (or decrease) in net worth (equity) for the year after
tax.  To make this work for personal finances you need to create separate
income header  accounts for your taxable and non-taxable income and for tax
deductible and non-tax deductible expenses so that you have the correct
balances for calculating your taxable income and gross tax payable under
total income and total expense header accounts. 

 

A complication on this will be that your tax will be  due after the end of
the financial year it is calculated on  and any refund will also  be
received in the next financial year. These can be recorded in the next
financial year as long as you carry forward the totals in your asset and
liability accounts into that year as well. They will not be zero in this
case as your tax liability falls in the next financial year and not in the
year on which the tax is paid and calculated. 

 

David Cousens

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