Siblings Caitlin and Colin hold the following Investments in their individual names. Caitlins marginal Tax Rate is 19% and Colins is 45%.

Both have invested in their own name the following two investments.

1. $100,000 each in 3.5% p.a. interest bearing fixed income deposit.
2. $90,000 each in shares of CSL, paying fully franked dividends of $3,400. The corporate tax rate is 30%.

1. Calculate the tax that both Caitlin and Colin will separately pay on each of their individual investments at the marginal tax rates indicated.
2. Show the total tax they each separately will pay on the combined investment income (that is the net of the interest tax and dividend tax).

Show all workings and details of how the tax was calculated for each of the two investments. Include in your answer the value of the imputation credit and the grossed-up amount of the dividend? You may ignore Medicare levy.

3. Briefly discuss the effect of the dividend imputation tax system on the behaviour of companies in regards to the companys dividend payout ratio.