8. Companies

Question 1

What are franked dividends?

Answer 1

have a tax offset attached for the underlying tax paid by the company

Question 2

What are unfranked dividends?

Answer 2

dividends from a company that have no attaching tax offset

Question 3

If a company becomes public on the last day of the financial year how will it be treated (public/private)

Answer 3

It will be treated as public for the whole year.

This may be relevant when applying deemed dividend provisions (division 7A)

Question 4

Does the commissioner have powers to treat public/private companies differently?

Answer 4

Yes, under s. 103A (5 & 6) ITAA 1936

Question 5

If a subsidiary owned by a public parent company is wholly owned will it be public?

Answer 5

Yes, it will be public for tax purposes

Question 6

For taxation purposes, what is the definition of a company?

Answer 6

under s. 995-1 (1) a company is
a body corporate
or, any other unincorporated association or body of persons, but does not include partnerships.

Question 7

How does a franking tax offset relate to a company?

Answer 7

A company might be entitled to the offset.

They can not be refunded, but can be converted into tax losses

Question 8

How does a Foreign Income Tax Offset relate to a company?

Answer 8

a company may be entitled to a FITO

Like other taxpayers, excess FITO cannot be refunded or converted into tax losses (use it or lose it)

Question 9

What is a SBE?

Answer 9

An entity with an aggravated turnover of less than 10 million

Question 10

What is a base rate entity in company tax?

Answer 10

no more than 80% of its assessable income is ‘base rate entity passive income’ (BREPI)
its aggregated turnover is less than $50 mil

Question 11

What is base rate entity passive income in company tax?

Answer 11

it is any assessable income which is
Dividends and franking credits
Interest 
Royalties
Rent
Net capital gains
A partnership or trust distribution of BREPI

Question 12

When do franking credits usually arise?

Answer 12

When a resident company makes a payment of Aus income tax or receives a franked dividend

Question 13

When do franking debits usually arise?

Answer 13

When a resident company pays a franked dividend or receives an Aus income tax refund

Question 14

How does a franking account operate for a company?

Answer 14

On a tax-paid basis, If a company pays income tax of $30 it will generate $30 credit in the franking account

Question 15

What are the three major restrictions on the allocation of franking credits to distributions?

Answer 15

The maximum franking credit rule Division 202-55
The benchmark rule Division 203
The anti-streaming provisions in Division 204

Question 16

Does a company have to have profits to pay dividends?

Answer 16

Under the Corporations Act it doesn’t but the ATO believes there should be but it is no longer illegal

Question 17

How is the corporate tax rate for imputation purposes worked out?

Answer 17

in s. 995-1

• worked out on the assumption that its ‘aggregated turnover’, ‘assessable income’ and ‘base rate entity passive income’ are the same as the previous year.
• if the company did not exist in the prior, 27.5% is used

Question 18

How is the Maximum Franking Credit Rule calculated? (to work out the total the shareholder can claim in their assessable income)

Answer 18

amount of frankable distribution x (corporate tax rate for imputation purposes/100%-corporate tax rate for imputation purposes)

Question 19

How are franked dividends treated in an individuals shareholders tax return?
basically the same for partnerships, trusts and superannuation funds.

Answer 19

include the dividend and the franked amount
= taxable income
x tax rate
less franked amount (offset)
= tax payable/refundable
Called the ‘gross up and offset’ approach

Question 20

How are franked dividends treated in a shareholders tax return that is a company?

Answer 20

same as other entities, but they hold a franking account and they can not convert it into a tax refund

Question 21

Rules on the order of applying tax offsets

Answer 21

Apply the non-refundable tax offsets before the offsets that can be refundable

Question 22

What are tainted share capital accounts?

Answer 22

if a company distributes an amount from its share capital account to its shareholders the payment is treated under CGT rules, not as a dividend

Question 23

What is Trans-Tasman imputation?

Answer 23

it allows a NZ resident company to choose to enter the Australian dividend imputation system and maintain a franking account

Question 24

What tests does a company have to satisfy to utilise a prior-year loss on a current year’s income?

Answer 24

The ‘continuity of ownership’ test

The ‘business continuity’ test (similar business test)