A simple model for pricing imputation tax credits under Australias dividend imputation tax system

Abstract

The equilibrium value of imputation tax credits has important implications for corporate and portfolio investment in the Australian capital market. Two features of Australia's tax credit system are (i) the credits are available only to a subset of investors (taxable residents) and (ii) trading in tax credits is restricted. Modelling these features indicates that non-residents will have zero demand for some Australian assets. For assets held by non-residents, the value of tax credits will be a function of the aggregate demand for risky assets by taxable residents relative to the demand of all investors in the Australian market. This suggests that the value of tax credits hinges on the extent to which the Australian market is integrated with foreign markets. Finally, if the restriction on selling tax credits is relaxed, the equilibrium value of tax credits will be higher than this simple model indicates.