Tax-induced Earnings Management within a Dividend Imputation System

Bala Balachandran, Christopher Dean Hanlon, Hanghang (Candie) Tu

Research output: Contribution to journalArticleResearchpeer-review


This study examines whether, under a full dividend imputation system, companies defer income until tax changes beneficial to shareholders take effect. Using a sample of Australian listed companies, we find that companies manage earnings downwards via discretionary current accruals in the year preceding a reduction in personal income tax rates, and in the year preceding a change in the tax status of superannuation funds, which reverse the first year both changes operate in unison. We also examine whether such earnings management is a function of a company’s ownership structure and dividend payout policy. We find a company’s earnings management varies according to the proportion of shares held by superannuation funds, consistent with superannuation funds, as an investor-type, benefiting most from income deferral. We also find income deferral is more likely for dividend-paying firms, consistent with the deferral of dividends and the deferral of income being alternative ways to exploit shareholder-level tax changes to enhance shareholder wealth. Our results are informative of the likely behavior of companies should recent recommendations for reduced personal tax rates be implemented.
Original languageEnglish
Pages (from-to)555-582
Number of pages28
JournalAustralian Tax Forum
Issue number3
Publication statusPublished - 2013

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