Companies Flashcards
- How are the treatment of companies different to trust and partnerships.
- How often does company calculate it taxable income. What is companies income year. What is the tax rate for a company.
- What are some distinction between how companies pay income tax and the treatment of individuals.
(3 points)
- Companies are treated as distinct tax payers, this is different from trust and partnerships which are considered a flow through entity
- A company is required to calculate is taxable income or tax loss for each income year. A company’s income year is the previous financial year. It generally pay a flat rate of 30%
- Companies are not liable to pay the medicare levy, they cant benefit from the CGT discount and are subject to rules to carry forward losses.
What are dividends characterised as once they are received by the shareholders .
Profits being paid out to dividends lose their underlying characteristics when they are paid out to shareholder. The profits paid to shareholders are new amounts rather than amounts whose source is traced to the entity
- What is the definition of a company, section
- What are the two type of companies, section, what are the applicable test to determine which one is which
- What is the treatment is a subsidary
- Company is defined in ITAA97 as: a “body corporate” or “any other unincorporated association or body persons but excludes partnerships
- Tax law distinguishes between public and private companies S 103A(1).
If a company is not public then it is private S 103A(1). A listed company is generally a public company however may be private if it satisfies the 20/75% test
20/75% test: where 20 or fewer ‘person’ are entitled to 75% of paid-up capital, voting power or dividends,
Persons include relatives, and associated entities
- A subsidiary of a public company is also a public company
Explain the nature of members interest
Who owns the share?
Who owns the property of the company?
What does disposal of assets result in.
What does disposal of an asset result in?
A company is a separate legal entity, distinct from its members or shareholders
The shareholder in a company own the shares in the company but do not own its assets which are the separate property of the company. Disposal of assets by the company give rise to a CGT event by the company
Share are CGT assets for the shareholders
What is the definition of dividends
What is not included in dividends
S6(1)
A dividends includes a ‘distribution’ made by a company to its shareholder and any amount ‘credited’ by a company to its shareholders as shareholders
A dividends does not include:
Amounts debited against the company’s share capital account” certain monies etc for the redemption or cancellation of redeemable preference shares
Explain what is meant by a deemed dividends (section)
Give three of the most common examples of deemed dividends.
S 109 ITAA36
Deemed dividends.
Private companies being controlled by small group of shareholder may try and enter into arrangements whereby they disguise profit distributions by making excessive payments to associated persons. For example: a private company many pay an excessive salary to the spouse of one of its directors. If not for this section the company will be allowed a deduction for the excessive payment. The excessive part of the payment is not allowed as deduction and is treated as an unfrankable credit
Div 7A ITAA36
If a private company is deemed to have paid a dividend where:
- it pay an amount to shareholder or an assoicate of the shareholder
- It makes a loan to a shareholder or an associate which is not fully repaid by the lodgement day
- It forgives a debt owned by a shareholder or associated
( three above points have a section look at lecture notes )
In regards to demmed dividends which section provides exclusion and what is the general idea
There are exclusion of Div 7A ITAA36, this mostly provides criteria for which a loan is given is still considered a loan and not dividend.
What is the treatment of dividends to resident shareholder (section)
Resident shareholder are generally required to include dividends in their assessable income S 44(1) (A)
What is the treatment of dividends for non-resident shareholders
Dividends paid by resident companies to non-resident shareholder are generally subject to witholding tax. Withholding tax is around 30%. (section in notes)
Withholding dividend does not apply to the franked part of the dividend (section is in the notes)
Dividends that are subject to withholding tax or that are exempt from withholding tax because they are franked is categories as non assessable non exempt income (section in notes)
What are the benefits of the imputation system to the resident tax payer
The imputation system can give rise to tax offset for resident shareholders S 207-20(2)
Explain the process in which a company can provide a franking distribution
Franking involves a corporate tax entity allocating tax it has paid to “frankable distributions”
Tax is maintained through two main entries
Franking credit
Franking debits
Records the transaction on a franking account where it can determine if it can payout a franked dividend.
What are the main franking debits and franking credits
Franking debits
- Payment of franked distributions
- Receipt of tax refund
- Under franking of distribution
- Anti-avoidance provisins apply
- On-market buy backs
Franking credit
- Payment of tax or PAYG installment
- Receipt of franked distributions
- Liabilities of franking deficit tax
If a company has paid a 50% franked dividend of 70 000 what is the relevant entry in the franking account.
70 000 paid in dividend and is is the after tax amount.
70 000 / 0.7 = 100 000
100 000 is the pre tax income used to distribute the dividend
therefore 100 000 - 70 000 = 30 000 was paid in tax
As the 30 000 was 50% franked then there is debit of 15 000 in the franked account as debits reduce the “credits or tax paid by the company”
- What can franking credit only be allocated to….
- When is a distribution unfrankable
- How does a corporate entity frank a distribution is there any restrictions
- Corporate tax entities can only allocate franking credits to “frankable distributions”
- A distribution is unfrankable if it falls withing S202-45
Distribution form share capital account
Deemed dividends use s 109 or Div 7A - A corporate tax enity franks a distribution by allocating a franking credit to it. It can not exceed the maximum franking credit for the distribution
Maximum franking credit = amount of frankable distributions x 30/70
What are the three standards of franking that a distriution can take
How do you calculate the franked part of the distribution and the undranked part
Dristributions may be:
Fully franked, partly franked or unfranked
The franked part of the distribution is the distribution less the “franked part”
The “franked part” of the distribution is
Franked part of distribution = franking credit on distribution x 70/30
The unfranked part of a distribution is the distribution less the “franked part”
