Imputation to Single Tier System free essay sample

There are several advantages and disadvantages of the single tier dividend system over the imputation system. The first and main advantage of this system is the ‘complete free flow in the channeling of profits of the company to the shareholders as exempt dividends’ (Choong, 2008). This is to say that as long as there are profits made by the company, it is allowed to frank the said profits as dividends to its shareholders without any limitations. Under the imputation system, the company was allowed to pay dividends only to the extent of its Section 108 credits. Capital gains are not taxable in Malaysia; consequently the gains do not create tax credits. ‘With the abolition of the imputation system, capital gains may now be distributed to shareholders without first ensuring the company has paid sufficient income tax’ (Koh, 2007). Essentially this means the company may distribute more dividends to their shareholders. Second advantage is it reduces the administrative costs for the tax authorities because there is no longer any need to oversee the Section 108 credit accounts of the various companies. We will write a custom essay sample on Imputation to Single Tier System or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page They also do not need to handle any claims for repayable tax by shareholders who have surplus tax credits over their tax liability. This will allow the authorities to concentrate on other important tax issues such as tax auditing. Thirdly, the single tier system supplements the group relief provisions. ‘Beginning Year of Assessment 2006, tax losses may be utilised to set-off against the aggregate income of another company within the same group provided stipulated conditions are met’ (PricewaterhouseCoopers. 2008). If the conditions are met, the company that is making losses can transfer up to 50% of its losses to the company that is has an aggregate income. Nonetheless, here are a few disadvantages with the single tier system as well. Firstly is that those who are of the lower income group, and is subject to tax at a rate lower than the current corporate rate, will no longer be able to claim any tax refund. ‘Furthermore, tax exempt bodies which may include non-profit organizations will also lose the right to tax refunds’ (Koh, 2007). Also affected by this are Small and Medium Enterprises (SMEs). Under the single tier system, there is no longer any Section 110 relief and therefore no tax repayable to the shareholder. Furthermore, interest expense is normally incurred to obtain shares is not taken into account in the single tier system. This is due to the fact that dividend income is now tax exempt. Under the imputation system, interest expense is deducted against gross dividend in Section 4(c) of the Act to get to statutory income. Consequently, the tax credit on dividend income will be more than the tax payable on dividend income, resulting in cash refund. In the single tier system, interest expense will be a permanent loss.