Topic 9 – Taxation of Companies and Superannuation

Dividend imputation, tax losses, consolidation, franking account

Chapters 19 and 16

General Concepts

• Companies lodge a tax return each year

• Pay tax – BAS, PAYG instalments

• Sales x instalment rate – set by ATO

• Self – assessment – no assessment issued – 4 years to amend – 2 years if SBE

• Flat rate of tax – 30% (on first dollar)

Definition of a Company s 995-1

• A body corporate; or any other unincorporated association or body of persons; but– Not a partnership, or non-entity joint venture

• Public company – listed on ASX

• Otherwise private company

• Different from Corporations Act 2001

Residence of Company

• Statutory and Common Law definitions

• S 6(1), ITAA 36 – incorporated in Australia

• If not, carries on business in Australia – central management and control, – voting control by majority of Australian

residents

Taxation Treatment

• Income – s 6-5 and s 6-10, ITAA 97 – taxed on worldwide income

• Deductions – s 8-1, similar to all taxpayers• No rebates but tax offset for imputation credits,

PAYG instalment credits and foreign tax credits.• Distributions – dividends – s 44, ITAA 36• Substituted Accounting Period and public officer,

responsible for all taxation matters

Company Losses – Division 36 and Division 165, ITAA 97

• Losses - two tests - continuity of business and continuity of ownership

• Section 165-13 and deduction under s 36-17.• must have same owners and control throughout

loss year• if not same owners, must have carried on same

business, no new or additional business• Can be carried forward indefinitely

Company Loss Tests

• Test introduced to prevent tax avoidance through tax loss company trading

• ownership can be traced back through a group of companies

• same business test requires no income to be generated from any other type of business

• Grouping of losses - 100% subsidiary, now consolidation from 1 July 2003

Company losses

• Capital losses - same tests apply

• Foreign losses - cannot be used to offset Australian income, carried forward to offset foreign profit

• Bad debts - must satisfy loss tests.

• Deductible under s 25-35, ITAA 97

Avondale Motors (Parts) v FCT

• What is required in order to satisfy the continuity of business test to claim carry forward losses?

• Ownership very easy, but continuity of business requires the same business, an identical business.

• High Court – must be identical business and not a similar business. Company was bought because of the losses. The new business changed the name of the company but the business activities were not identical.

Capital Gains Tax

• Income tax on capital gain - no separate tax• Post 20 September 1985 - CGT applies• Pre-CGT asset in company- majority underlying

interest - test day (5 yrs)• Post 21 September 1999 - no indexation or

averaging - discount method (50% individuals), Companies no discount

• Asset purchased prior to 21 September 1999, can still use indexation.

Pre CGT - Assets and Shares

• Designed to bring pre – CGT assets within the CGT regime

• Section 149-30 – assets owned by the company, 50% of shareholders

• Test day – 5 years and must be assessed within 6 months.

• Abnormal trading in companies shares can create a problem for public companies

Pre CGT status

• Pre CGT shares in a company – cannot use the company to avoid income tax by selling post-CGT assets in the company

• Section 104-230 - If post CGT assets acquired greater than 75% of net value of the company, then CGT liability occurs when the pre-CGT shares are sold.

Group Companies

• Transfer losses• Rollover assets - no CGT implications• Ability to transfer foreign tax credits from one

group to another• Consolidation optional for the company group, but

effective from 1 July 2002• Script for script rollover relief - 80% of shares,

units and options acquired

Distribution - Dividends

• Company - return to shareholder – dividend, s 44• Trust - return to beneficiary - distribution• Public trading trust - trust dividend (taxed as a

Company)• Deemed dividends - private company - excessive

remuneration• Loan or benefit to shareholders/associates -

deemed dividends

Brookton Co-Operative Society v FCT

• When is a dividend paid – when it is declared by the Directors or distributed to the shareholders?

• The dividend is only paid and treated as income in the hands of the shareholder when actually paid and not just declared by the Directors. The Director’s can rescind that decision at any time.

Dividend from Foreign Company

• Non-portfolio dividend - holds more than 10% - dividend exempt from tax in Australia- s 23AJ - ITAA 36

• Exempt dividend does not offset other losses of company

• Ordinary foreign dividend - subject to tax in foreign country (DTA) and included in assessable income in Australia

• Tax credit for foreign tax paid

• Withholding tax - 30% or 15% (DTA)

Dividend Imputation

• Company tax imputed to shareholder - avoids double taxation

• I July 1987 introduced in Australia• Company pays a franked dividend with

franking credits from franking account• Franking account - credits for tax paid and

debits for dividends paid• Excess franking credits – refunded, Div 67

Example

Company level

Taxable income 100Less: Company tax 30% 30

-----Net corporate profit 70Franking credit - franking account 30

Shareholder levelFully franked dividend 70Imputation credit 30Gross up – included in assessable income 100

Example - cont

Shareholder pays tax at 46.5% (income over $150,000)

Tax on 100 x 46.5 = $46.5

Tax payable - $46.5

Less: tax offset $30 - imputation credit

Tax to pay by shareholder - $16.5

Total tax paid on profit = $30 company + $16.5 individual

Example of Individual receiving a dividend

• Individual shareholder receives a 100% franked dividend of $10,000. The following amount is included in assessable income –

• Dividend - $10,000

Plus imputation credit: dividend x 30/70 (gross up) = $4,285

• Gross dividend included in Assessable income = $14,285

Example of Individual receiving a partly franked dividend

• Individual shareholder receives a 50% franked dividend of $10,000. The following amount is included in assessable income –

Dividend - $10,000• Plus imputation credit:• Dividend x 30/70 (gross up) x 50% = 2,142• Gross dividend included in Assessable income

= $12,142

Franking Rules

• Companies can frank to any percentage – benchmark rule

• Benchmark Rule - all dividend must be franked to same percentage during income year

• Penalty for breach - franking percentage differential - to stop companies retaining franking credits

Franking Account

• Credits from PAYG instalments

• Pays income tax - credit

• Receives a fully franked dividend – credit for franking attached to dividend

• Debit from using franking credits

• Franking deficit tax

Example of movements in the Franking Account

Date Activity Debit($) Credit($) Balance($)1/7/04 Opening Balance 3,00021/7/04 Payment of 4th quarter

tax instalment of $6,000 6,000 9,00030/9/04 Fully franked dividend

of $21,000 received – Credit = 21,000 x 30/70 = 9,000 9,000 18,000

28/10/04 Payment of 1st quartertax instalment of $9,000 9,000 27,000

22/6/05 Payment of fully-frankeddividend of $14,000. Debit = $14,000 x 30/70 6,000 21,000 

30/6/05 Closing balance (opening• balance on 1 July 2005 21,000

Dividend Streaming

• Dividend imputation only of value to a resident shareholder.

• Companies want to pay franked dividends to resident shareholders only

• Companies want to pay unfranked dividends to non-resident shareholders

• Dividend streaming caught by Div 204 - ITAA 97• Non-resident shareholders paid from foreign profit• Bonus shares - return of capital

Anti -Avoidance Measures

• Part IVA, ITAA 36 - tax avoidance• Cannot trade franking credits or stream dividends• 45 day holding period - must hold shares at risk

for more than 45 days in order to claim franking credits and 90 days for Preference shares

• De minimis rule – 45 day (90 day) only applies if more than $5,000 value of tax offset claimed using franking credits

Specific Anti-avoidance – Div 7A

• Designed to prevent tax free loans being paid to shareholders or associates of shareholders.

• Deems the payments to be unfrankable dividends – payments (former s 108, ITAA 360, loans and forgiveness of debts.

• Loans will not be caught if – in writing, commercial interest charged (usually FBT interest rate), and repaid within 7 years unsecured or 25 years if secured over land by a mortgage.

Consolidation

• Introduced where a group of companies

• To reduce compliance costs - one tax return, BAS, and PAYG instalment payments

• Intra-group transactions ignored

• Losses, franking credits and foreign tax credits pooled

• CGT not applicable in moving assets, shares

Superannuation – Chapter 16

• Superannuation fund a form of trust

• Contributions and income taxed at 15%

• CGT discount of 33.3% - taxed at 10%

• Complying fund – complies with SIS Act (Superannuation Industry (Supervision) Act 1993)

• Non-complying funds taxed at 46.5%

Specific Issues

• Public offer funds – APRA supervision• Self-managed funds (SMSF) – ATO supervision• Maximum number of members – 4• Issues of ‘sole purpose’ test – Swiss Chalet case• Investment plan• Fund can borrow but subject to strict requirements• Only 5% for ‘in-house’ assets

Taxation of Superannuation

• Superannuation Industry (Supervision) Act 1993 (Cth) – duties and obligation of trustees and the manner of investment of the fund.

• All eligible employees in Australia earning more than $450 per month have an amount representing 9% of their salary/wages paid into a fund.

Taxation

• Generally contributions are tax deductible for the employer called concessional contributions, taxed at 15%.

• Non-concessional contributions paid in by the employee not taxed in the fund. Note salary sacrifice contributions still subject to 15% tax.

• All contributions and earnings are tax free on retirement once the member has reached the age of 60 years - NANE.

Simplified Superannuation

• Tax Laws Amendment (Simplified Superannuation) Act 2006.

• New law to apply from 1 July 2007: if over 60 years of age when retire superannuation benefits tax exempt and not assessable - NANE.

• Under 60 years, taxable but with rebates on pensions.• Concessional contributions limited to $50,000 per year per

person. A 5 year transitional cap for those over 50 years at $100,000 until 2011/2012 year.

• Limits on non-concessional amount contributed - $150,000 per year or $450,000 every 3 years.

Other issues

• Self-employed will be able to claim a full tax deduction for contributions.

• Employees up to 75 years of age can have deductible contributions made by their employer. If over 75 years only 9% SGC.

• RBL’s – Reasonable Benefit Limits abolished. Cap on contributions will act as a control on the amount contributed.

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