Presently, the existing imputation system could hinder companies from distributing corporate income to shareholders, as they require sufficient tax credits before dividends can be paid. In particular, there are restrictions on the distribution of dividends from capital gains and other non-taxable corporate income. Under the imputation system, a company may not be able to pay out as much dividends to shareholders as it would wish to, due to such restrictions.
The new one-tier system will free companies from a number of restrictions relating to the distribution of corporate profit as dividends, including removing current restrictions on the distribution of dividends from capital gains and other non-taxable corporate income. The one-tier system, along with new measures in group relief and the lower corporate tax rate, will increase company profits available for distribution. These could result in higher dividend payouts for all shareholders. This would benefit all shareholders, including individuals who either do not pay income tax or are in the lower-income tax brackets.
Nevertheless, the government is mindful of the fact that many companies will not be able to make full use of their accumulated dividend franking credits by 1 Jan 2003. Hence, it has allowed a 5-year transition period from 1 Jan 2003 to 31 Dec 2007 for companies to pay franked dividends out of any unutilised dividend franking credits as of 31 Dec 2002. All shareholders will still be able to receive dividends with credits attached during this period.