Dividend Reinvestment Plans: A Tax-Based Incentive Under the Australian Imputation Tax System

19 Pages Posted: 28 Jul 2015

See all articles by Mathew Abraham

Mathew Abraham

Whitireia Business School

Michael J. Dempsey

TDT University; Financial Research Network (FIRN)

Alastair Marsden

University of Auckland - Business School

Date Written: March 25, 2015

Abstract

An innovative feature of the Australian tax code is the provision of "imputation tax credits" that reduce the effective tax paid by Australian investors on dividends received from Australian firms. The feature is generally regarded as providing a tax incentive for corporations or firms subject to Australian corporate tax to distribute available cash to investors rather than seeking to retain the firm’s profits. More recently in Australia, dividend reinvestment plans (DRPs) have been increasingly utilised by firms that allow investors to have their cash dividends automatically reinvested in new shares issued by the firm. Such plans offer firms an alternative source of equity capital to either retention- or stock-financed equity capital. This article demonstrates the link between the tax liabilities of investors and the propensity of firms to avail themselves of a DRP innovation. We argue that the increasing use of DRPs in the Australian equity market subsequent to the introduction of the imputation tax system can be explained by tax-saving efficiencies that allow the firm the opportunity to lower its cost of financial capital. From a policy perspective, this will act to stimulate overall investment.

Keywords: dividend policy; dividend reinvestment plan; imputation; franking credits; taxes

JEL Classification: G35, H25

Suggested Citation

Abraham, Mathew Puravady and Dempsey, Michael J. and Marsden, Alastair D.E., Dividend Reinvestment Plans: A Tax-Based Incentive Under the Australian Imputation Tax System (March 25, 2015). Australian Tax Forum, Vol. 30, 2015. Available at SSRN: https://ssrn.com/abstract=2636667 or http://dx.doi.org/10.2139/ssrn.2636667

Mathew Puravady Abraham (Contact Author)

Whitireia Business School ( email )

Level 2, 450 Queen Street
PO Box 106 219
Auckland, Auckland 1143
New Zealand

Michael J. Dempsey

TDT University ( email )

District 7
Ho Chi Minh City, 3001
Vietnam

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Alastair D.E. Marsden

University of Auckland - Business School ( email )

Private Bag 92019
Room: C208
Auckland
New Zealand
64 9 373 7999 (Phone)
64 9 373 7406 (Fax)

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