Companies and Shareholders | My Assignment Tutor

1CompaniesandShareholders© The Australian College for Microcomputers Pty Ltd Sydney 2020(Provided under License to Taxation Law Students for study purposes only. Selling, copying or any commercial dealings of any kind is strictly prohibited)DISCLAIMER• These notes contain a collection of slides for use by lecturers inTaxation Law.• It is not meant to be a complete nor comprehensive coverage of thetopics involved. Rather it is an aid to assist students in note taking.It should be understood that these slides may be modified,discarded or supplemented by lecturers at their absolutediscretion.• Students should not rely on the information contained in the slides,but should use them as a preliminary basis for research only. Thisarea of the law is changing on a daily basis and these slides are notmeant to cover more than some broad themes referred to inlectures and to trigger discussion. At all times, students shouldrefer to primary sources such as the actual legislation, courtreports & current ATO rulings.• Do not rely on the summaries contained in these slides.• For individual and /or personal advice, students should consultqualified advisors in finance, tax, accounting and law.Main Issues1. Impact on Company’s Taxable Income2. Dividend ImputationGeneral• Company is a “person” – a separate legal entity• Non-BRE Companies have a flat tax rate of 30% with no taxfree threshold. (BRE = Base Rate Entities)• Company has an obligation to pay tax on its taxable income generally speaking, the rules applicable to assessable incomeand deductions that apply to individuals apply to companies plus some specific provisions• Companies now assess their tax liability on a monthly orquarterly basis as part of their BAS requirements.• These tax instalments are based on gross income multiplied by aratio [based on the previous year] to be close to the likely tax forthe income year.1 23 42Section 995-1 DefinitionsCompany means:(a) a body corporate; or(b) any other unincorporated association or body of persons;but does not include a partnership or a *non-entity jointventure.Partnership means:(a) an association of persons (other than a company or a *limited partnership) carrying on business as partnersor in receipt of * ordinary income or * statutoryincome jointly; or(b) a limited partnership.Note: Division 830 treats foreign hybrid companies as partnerships.Dividends / Distributions• Companies traditionally reward shareholdersby paying dividends / distributions• Classical system of taxation Prior to 1 July 1987, when company profits werepaid to shareholders by way of dividends, thoseprofits were effectively taxed twice• Dividend Imputation On 1 July 1987 dividend imputation wasintroduced so that companies can now pay“franked dividends” to shareholdersDividend Imputation• The company profits are taxed and arethen distributed to shareholderstogether with an imputed credit for taxpaid.• The Franked Distribution is themechanism used to allocate the tax paidby the company to the shareholderDividend Imputation• A franked distribution includes a credit for the companytax paid on it• A distribution can be franked between 0% – 100% A fully franked distribution is one with a franking credit of100% A partially franked distribution is one with a franking credit ofless than 100% An unfranked distribution is one with a franking credit of 0%• The company must comply with theBenchmark Franking Rule5 67 83 • Purpose of the Benchmark Franking Rules is toensure that all shareholders are treatedequally.• All distributions during the franking periodshould be franked at the Benchmark Frankingpercentage• The franking period for private companies isthe income tax year• Non-private companies have two frankingperiods. The first is based on the first sixmonths of the income year and the second isbased on the second six months of the incomeyearBenchmark Franking Rules • The Benchmark Franking percentage is thefranking percentage of the first dividend paidduring the franking period.• Failure to comply with the Benchmark Ruleswill make the Taxpayer liable to an overfranking tax or a franking debit to the extent ofthe over franking or under franking.Benchmark Franking RulesFranking AccountCompanies must record Franking Credits and Franking Debits in the Franking Account DateDetailsFranking Debit(minus)Franking Credit(plus)Balance Franking CreditsFranking credits:• Payment of Company Tax (credit = tax paid)• Receipt from another corporate entity of a Franked distribution (credit = distribution x 30/70 x franked%)• Incurring a liability for Franking Deficit Taxsection 205-15Franking debits:• Refund of Company Tax or PAYG rate variation credit• (Debit = tax refund)• Payment of a Franked Distribution• (Debit = distribution * 30/70*franked %)• Penalty debits (under-franking debit)section 205-25 9 1011 124 DateDetailDebitCreditBalance1 JulyOpening balance01 JulyPaid $35,000 dividend franked to 70% (35,000 x 30/70 x 70%)(10,500)(10,500)28 Jul4th PAYG tax instalment paid – $3,2003,200(7,300)25 AugReceived $15,000 dividend franked to 50% – (15,000 x 30/70 x 50%)3,214(4,086)28 Oct1st PAYG tax instalment paid- $15,80015,80011,71430 NovRefund of tax – $840(840)10,8741 DecPaid $60,000 dividend franked to 30 % (60,000 x 30/70 x 30%)(7,714)3,1601 DecUnder franking ($60,000 * 30/70 * 40%)(10,286)(7,125)28 Feb2nd PAYG tax instalment paid – $14,20014,2007,07515 AprReceived $35,000 dividend franked to 70% – (35,000 x 30/70 x 70%)10,50017,57522-AprPaid $100,000 dividend franked to 100% (100,000 x 30/70)(42,857)(25,283)28 Apr3rd PAYG tax instalment paid – $16,80016,800(8,483)30 JuneClosing balance(8,483)Franking Deficit Tax = $8,483Franking account Deemed DividendsOnly applies to Private Companies• Division 7A ITAA 1936• Section 109 ITAA 1936Definitions• Private company means a companythat is not a *public company for theincome year• Public company means a companythat is a public company (as definedby section 103A of the Income TaxAssessment Act 1936) for the incomeyear.Division 7ADivision 7A applies automatically to:• payments, loans or debts forgiven(sections 109C, 109D, 109E & 109F)• by a Private Company• to a shareholder or an associate of a shareholder.“Associate” is defined in section 318 of ITAA 1936Impact:In the shareholder’s hands Division 7A deems a payment/loan/debtforgiven to be an unfranked distribution (dividend)13 1415 165Certain loans – excluded from the Division 7AAll four conditions must be satisfied:• Loan Agreement• Benchmark Interest Rate – refer to next slide• Term of loan Max. 25 years – Loan fully secured by real property mortgage Max. 7 years – All other loans• Minimum Yearly Repayments – refer to slide after nextSubdivisions C & D of Division 7A Division 7A ITAA 1936 Benchmark Interest RateYear to 30 JuneRateReference2019-20205.37%RBA2018-20195.20%TD 2018/12017-20185.30%TD 2017/172016-20175.40%TD 2016/112015-20165.45%TD 2015/152014-20155.95%TD 2014/202013-20146.20%TD 2013/17 Minimum Yearly RepaymentsAmount of loan not repaid by theend of the previous year of incomeCurrent year’sX benchmark interest rate1 -{1 + current year’s benchmark interest rate 1 Remaining term {Subsection 109E(6)Section 109N and Section 109E• Section 109N provides an importantexception where loans under a writtenagreement meet minimum interest rateand maximum term requirements.• However, after the initial year, it isimportant not to trigger section 109Ewhich deems a dividend to have beenmade if the minimum repayment is notmade.17 1819 206• Commissioner has discretion todisregard deemed dividendwhere honest mistake has beenmade and efforts have beenmade to rectify.• Interaction between the FBTrules and Division 7A.Division 7A Section 109• Where a private company• pays or credits remuneration for servicesrendered or a retirement or terminationallowance etc.• to an associated * person• THEN any amount that is in excess of whatthe Commissioner thinks is reasonable willbe deemed to be a dividend(* past, present shareholder or director or associate of them)Effect of Deemed Dividend• From the corporate perspective, theCompany loses the deduction for theunreasonable portion.• In the shareholders hands it deems theunreasonable part of the salary etc. tobe an unfranked distribution (dividend)Carried Forward LossesSimilar rules applies for Bad Debts21 2223 247Carried Forward LossesSection 165-10Has to satisfy general rulesPLUS• Show continuing ownershipsection 165-12or• Satisfy business continuity testsection 165-13Unless a Public ListedCompany or 100%owned subsidiaryRefer to Sub-division166-ASee also section 166-5and section 166-10Carried Forward Losses• For a company to claim a deduction for carriedforward losses additional conditions to those foran individual need to be satisfied.• The main additional condition is that either thecontinuity of ownership test (section 165-12) orthe business continuity test (section 165-13)needs to be satisfied.• These tests need to be applied to each carriedforward loss separately.Continuity of Ownership Test• This test is applied first.• The same persons must have more than 50% of thecompany’s voting power, dividend rights andcapital distribution rights from the beginning ofthe loss year to the end of the income year.• If this test is failed the loss is not “lost” yetbecause the business continuity test can still beapplied.Business Continuity Test• If the company fails the continuity of ownership test thecarried forward loss can still be deducted if the businesscontinuity test is satisfied.• This test can be satisfied by passing either the same businesstest (.s165-210) or the similar business test (s.165-211).• The same business test compares the business that thecompany carried on immediately before the time when thecontinuity test was failed and the business that the companycarried on during the whole of the income year.• No only must these be the same business (not just the sametype of business) but if there is a different business (as well asthis one) or a new transaction is entered into then the samebusiness test will be failed.• A company will satisfy the similar business test if it carries ona business (its current business) that is ‘similar’ to the businessit carried on immediately before the test time (its formerbusiness).25 2627 288 Similar Business TestIn determining whether a company’s current business is similar to itsformer business, the following factors are required to be taken intoaccount:• the extent to which the assets (including goodwill) that are used in itscurrent business to generate assessable income throughout the incomeyear were also used in its former business to generate assessableincome;• the extent to which the sources from which its current businessgenerated assessable income throughout the income year were also thesources from which its former business generated assessable income;• the identity of its current business and the identity of its formerbusiness, and• the extent to which any changes to its former business result fromdevelopment of commercialisation of assets, products, processes,services or marketing or organisational methods of the former business. Similar Business TestThe test will not be satisfied if, before the test time(generally when the ownership test is failed), the company:• started to carry on a business it had not previously carriedon, or• in the course of its business operations, entered into atransaction of a kind that it had not previously entered into,and did so for the purpose, or for purposes including thepurpose, of being taken to have carried on throughout theincome year a business that is similar to the business itcarried on immediately before the test time.


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