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

[Michael Gordon]

David, Thank you for an extraordinarily detailed guide on how to handle
this. I can't try it today but tomorrow I'll work my way through it.
Thanks again, much appreciated.
Mike.


On 15 July 2013 22:34, David Cousens <davidcousens at bigpond.com> wrote:

> 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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