- Company – a separate legal entity; It can enter into contracts and can be represented in the court of law.
- Think about taxable income; allowable deduction; derivation of the taxable income; net capital gains. Distributions received by the company; dividend, interest and royalty income; foreign income; bad debts deduction; capital allowance and capital works; blackhole expenditures;
Tax rate * Taxable income – Tax loss = Taxable payable
Company tax return lodgement date – small company (end of Feb); middle & large companies (middle of Jan)
Dividends and frank dividends
Consequence for a shareholder -dividend received and franking credits will be included in the assessable income; franking credit entitles the receiver a franking tax offset, which is equal to that credit.[Unique features of Australian dividend imputation system; so the dividend receiver will not be taxed twice on their income]
Consequence for a company – 1) the company has the access to the franking account, which allows the company to keep track of the amounts of franking credits and the amount of franking debits; 2) franking credits arise when a company makes a payment of Australian income tax or receives a franked dividend. 3) franking debits arise when a company pays a franked dividend or receives an Australian income tax refund. 4) To pay a franked dividend, the company must have franking credits.
Dividends : Interim dividend & Final dividend. Maximum franking rate(Big) = 27.5% ; Small business will be 30%.
What are frankable distributions ? – Distributions that are paid out of the company’s profits.
Unfrankable distributions – part of the share buyback; deemed dividend; dividends that are debited against the share capital account.
How to calculate the maximum franking credit ?
E.g. BT has a after-tax profit of $14,000. BT decided to pay $7000 out of its profit to its shareholders. BT’s tax rate for imputation purpose is 30%. Therefore, the maximum franking credit that BT can attach to the distribution will be $7000 * 30/70 = $3000
Benchmark franking % – the rate that establishes the franking over the year; This is meant to prevent companies from discriminating their shareholders.
Franking % of each distribution = the franking credit applied to the distribution/maximum franking credit that is allowed.
Underfranking – the company is required to debit the company’s franking account.
Overfranking – the company is liable for an overfranking tax. [penalty]
E.g. BT pays dividends that are franked to 40% [Benchmark franking %]. However, BT has paid a dividend of $70,000 that is franked to 60%. BT is a base rate entity and has a tax rate for imputation purposes of 30%.
The maximum franking credit = 70,000 * (30%/70%)
So the amounts of franking credits attached to the $70,000 distribution based on 60% is 18,000. [ 70,000 * (30%/70%) * 60%]
If we calculate the franking credits based on the benchmark rule (40%), the amount will be $12,000. [70,000 * (30%/70%) * 40%]
Therefore, BT has an overfranking tax liability of $6,000. [$18,000-$12,000]
Franking ledger – A company needs to maintain a franking ledger. It doesn’t exist in the account ledger, but it’s an account that the company can use to track its franking debit and credit.
Franking Credits – a company its PAYG installments
Franking Debits – a company receives a refund; makes a franked distribution
If the franking account is in debit, then company needs to make the shortfall account.
If the franking account is in credit, the credit can’t be carried forward.
In certain periods/circumstances, if a company pays a franking deficit tax, it may be entitled to a tax offset, which is equal to the amount of the franking deficit tax paid.
If the franking deficit is more than 10% of the total franking credits over the year. This tax offset will be reduced by 30%.
Tax losses & franking credits – If a company receives franking credits and tax losses , then the company can carry forward the franking credits. The company can converts any of the excess of franking credits to the following year, which can then be carried forward and deducted in the later income year.
e.g. BT that received a fully franked dividend of $210 with a franking credit with a franking credits of $90 allocated to it.
BT has an allowable deductions of $600 and net exempt income of $80. BT makes a gift of $50 to a hospital.
Step 1: Tax loss (1) = $210 + franking credit – $600(deduction)
= $210 + $90 – $600
Step 2: franking credit / tax rate = $90/30% = $300
Step 3: Tax loss (Step1+Step2) = $300 + $300 = $600
Step 4: Tax loss (final) = $600 – $80 = $520
Dividend streaming rules
1) The disclosure rule – It requires a company to notify the Commissioner in writing if its benchmark franking percentage for a
period ‘differs significantly’ from the last franking period in which a frankable distribution was made.
2) Linked distribution rule – It deals with the situation where a member of an entity who would otherwise receive a distribution from that entity chooses instead to receive a distribution from a linked entity with a higher or lower franking percentage. Where this occurs, a penalty franking debit arises in the franking account of the entity with the higher benchmark percentage.
3) Substituting tax-exempt bonus shares for franked distributions rule – This rule, found in s. 204-25, applies where a member is provided with a choice to receive a tax-exempt bonus share(s) in lieu of a franked distribution.
4) Streaming distributions rule – This rule, found in s. 204-30, applies where an entity streams distributions in such a way as
to give those members who benefit most from imputation credits (e.g. resident taxpayers) a greater imputation benefit than those who benefit less (e.g. non-resident taxpayers).
Dividend general anti-avoidance rules – a qualified person and hold the shares at risk for at least 45 days
Tainted share capital accounts – If a distribution is going to be made from the share capital account, then it’s going to be treated under the CGT rules rather than a dividend. A dividend is generally distributed out of the profits.