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CPA Program Australia Taxation > Week 5 > Flashcards

Week 5 Flashcards

1
Q

What is meant by aggregated turnover for SBE purposes?

A

The sum of annual turnover of the income year.

Includes all entities connected with / affiliates of the main entity during the income year.

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2
Q

What is the company tax rate for “base rate entities”? (2023/24)

A

25%

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3
Q

What is a base rate entity?

A

A company with:

(a) Aggregated turnover less than $50 million (2023/24)
(b) No more than 80% of assessable income as passive income.

Passive income = dividend income, franking credits, interest income, royalties, rental income, net capital gains and distributions from partnerships and trusts.

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4
Q

What is SBITO?

A

Small business income tax offset.

Offset available for soletraders and partnership / trust SBE’s, with a turnover of less than $5 million.

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5
Q

What is the maximum amount of SBITO? (2023/24)

A

$1000

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6
Q

True or false:

A company can claim SBITO

A

False

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7
Q

True or false:

A partnership is a separate legal entity.

A

False.

A partnership is NOT a separate legal entity.

It cannot pay income tax in its own right.

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8
Q

How are partnerships taxed?

A

The partnership lodges a tax return each year, however any income from the partnership is distributed to each partner and they include in their assessable income.

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9
Q

What happens when a partnership receives franked dividends?

A

Assessable income of the partnership includes both the dividend and franking credit.

When distributed to each partner, the partner received a share of both the franked dividend and franking credit. +

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10
Q

How are tax losses treated in a partnership?

A

In any income year that a loss is made, the loss is distributed same year to each of the partners.

Partner will be entitled to offset their share of partnership loss against any other assessable income in their individual name.

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11
Q

What section covers non-commercial loss rules?

A

Division 35 - ITAA97

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12
Q

True or false:

A partner in a partnership can earn a salary and it be tax deductible to the partnership.

A

False.

A partner is not considered an employee of a partnership.

Any salary is non deductible - it is treated as an additional distribution to the partner.

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13
Q

The profit and loss statement for a partnership includes an expense for a salary paid to a partner.

What needs to happen?

A

The expense should be added back when working out the net income of the partnership.

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14
Q

If a partner gets a distribution via a salary, in what order is the net income / distributions of the partnership calculated?

A

Partner salaries (distribution) is calculated first.

Then, remaining net income is distributed to each partner per their profit sharing ratio.

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15
Q

For a partnership salary to be effective in any income year, when must this agreement be completed by?

A

Agreement must be entered into before the end of the applicable tax year.

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16
Q

If a salary in the partnership agreement results in a loss, what happens?

A

Payment of salary cannot result in a loss.

Excess loss over the partners share is not assessable that tax year.

Excess will be assessable to the partner in a future tax year.

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17
Q

True or false:

Interest paid on monies lent to the business by a partner are tax deductible to the partnership.

A

True, where funds are used for the purpose of producing assessable income.

Partner lends money to the partnership in the capacity of a lender, not a partner.

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18
Q

If a partner makes a capital contribution to become a partner, is this treated the same as a loan?

A

No.

Interest on a loan is tax deductible to the partnership.

However, initial capital contribution is not a loan. Like partnership salary, interest paid is regarded as a distribution of partnership profit.

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19
Q

What are the steps in calculating net income of a partnership for tax purposes? (5 steps).

A
  1. Determine accounting profit
  2. Addback partners salaries, treat as a distribution
  3. Interest paid on loans is tax deductible to partnership
  4. Addback interest paid on capital contribution, treat as a distribution
  5. Ignore any drawings.
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20
Q

True or false:

Drawings are included in the distribution from a partnership.

A

False.

Drawings are ignored for tax purposes / distribution purposes.

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21
Q

A partnership borrows money to repay a partners capital contribution.

Is this deductible to a partnership?

A

Yes, provided monies replace the capital contributions made by partner and are for working capital purposes.

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22
Q

If a partner is under 18, how is their share of profits from a partnership taxed?

A

Per Division 6AA, commissioner can determine what is a reasonable return for the time and effort put into the partnership by the minor.

Amounts considered “reasonable” will be taxed at normal rates
Excess amounts considered “eligible taxable income” will be asessed at special rates.

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23
Q

What is an Everett Assignment?

A

Where a partner in a firm assigns their stake to a third party.

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24
Q

How is an Everett Assignment taxed?

A

A CGT event occurs when stake is assigned.

Cost base - amount of consideration to acquire the stake
Consideration - market value

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25
Is work in progress included in net income of a partnership?
No, unless it creates a recoverable debt which partnership is entitled to payment.
26
What is the term that relates to any change in membership of a partnership?
Dissolution or reconstitution of a partnership
27
How can a partnership be dissolved?
Can dissolve through: - agreement of the partners - death or bankruptcy of a partner - court on application of a partner.
28
How can a partnership be reconstituted?
Where: - partner dies or retires and partners agree to continue partnership - new parter is admitted to the partnership
29
What are the 4 tax issues affected by the dissolution or reconsitution of a partnership?
1. trading stock (disposal to each partner) 2. depreciation (balancing adjustment) 3. CGT (each asset shared at a partner level) 4. GST
30
Which division covers trusts?
Division 6 - ITAA36
31
What are the 2 types of trusts?
1. Express 2. Non-express
32
What are the 2 types of express trusts?
1. Created between living persons (inter-vivos) 2. Will of any person (testamentary)
33
What is a non-express trust?
Come into existence without an expressed intention to create a trust.
34
What are the 3 types of non-express trust?
1. Implied 2. Resulting 3. Constructive
35
What is a **settlor** of a trust?
Person who makes the original property settlement to establish the trust fund
36
What is the **beneficiary** of a trust?
Person (or a company) who may benefit from the distribution of trust income/property.
37
What is the term for the following: "Person or company who manages the trust estate as legal owner of the trust property"
Trustee
38
Which section cover taxation of trusts?
Division 6, Part III of ITAA36.
39
Which party is responsible for managing the tax affairs of a trust?
The trustee
40
What does it mean by "beneficiary presently entitled" ?
FCT v Whiting and Taylor v FCT - Beneficiary musts be entitled immediate payment of the distribution. Common law - refer to the trust deed. Legal requirement to pay.
41
What happens when a trust beneficiary is under a legal disability?
Trustee is assessed on the share instead.
42
What are examples of a legal disability?
Taylor v FCT - he/she ould not give a valid discharge for a payment made to him / her - Under the age of 18 on the last day of the year of income - Undischarged bankrupt - Mentally incapacitated adult.
43
What happens if there are no trust beneficiaries who are presently entitled?
Trustee is liable to pay tax. Normally, will be taxed at top marginal rate (sect 99A). Commissioner may consider it unreasonable for 99A to apply, and tax at normal marginal rates.
44
Do different rules apply to non-resident beneficiaries?
Yes. Different rates and rules apply.
45
For a deceased estate, is annual & LSL paid out assessable?
No. Specifically exempt per s.101A(2)
46
What is a closely held trust?
A trust where up to 20 individuals have entitlement to 75% or greater or A discretitionary trust. Family trust is included in this definition. Excludes complying super fund / ADF, unit trust listed on ASX
47
What are the 7 steps in calculating trust net income?
1. Calculate income per the trust deed (generally exclude franking credits) 2. Calculate net income (assessable income - allowable deductions) 3. Determine any streaming of franked dividends / capital gains 4. Calculate each beneficiaries share 5. Determine residency of beneficiaries 6. Determine tax implications (type of income received -> cap gains -> NANE income) 7. Calcaulate entitle to net income of each beneficiary
48
How are losses handled in a trust?
The are effectively quarantined and cannot be distributed to beneficiaries.
49
What section covers tax losses?
Schedule 2F - ITAA36
50
What are the 4 trust loss tests?
50 percent stake test Income injection test Control test Pattern of distributions test
51
What is trust income calculated in reference to?
Definition of income in the deed. Often referred to as distributable income.
52
What happens when there is no reference to trust income in the deed?
Trust income is based on the concept of ordinary income instead.
53
What can be reasons for differences between trust income (as defined in the deed) and net income of a trust for tax purposes?
- Capital gains - Non-deductible expenses - Special incentives that do no form part of trust income for trust law purposes - Different basis for valuing trading stock or depreciating assets.
54
What is the proportionate approach?
Calculating tghe beneficiaries share of trust income, then apply that % to the net income.
55
What are the difficulties with the proportionate approach?
Can cause significant difficulties where the difference between income for trust law purposes and tax purposes (including CGT) is different. Can cause an inequitable result.
56
A discounted capital gain is included in the net trust income. What are the steps when calculating the income for the beneficiary?
When included in assessable income for the beneficiary, the beneficiary will gross-up the amount, before applying any capital losses then recalculate the discount or CGT SBE exemption.
57
True or false: Trust income retains the same character when it is distributed to a beneficiary, as it had when received by the trustee.
True. For example, if a trustee received a fully franked dividend, the distribution will result in the beneficiary having to gross up the dividend income and be entitled to a franking credit offset.
58
What is "streaming" in relation to trust distributions?
Directing (i.e. streaming) different classes of income to different beneficiaries per the trust deed. e.g. franked dividends are streamed to beneficiaries who can best use the tax offset.
59
Which court case effectively gave uncertainty to streaming of trust income?
FCT v Bamford (2010). New legislation was introduced thereafter to clear up the issue.
60
What does Division 6 (post 2010) now allow?
Confirms that trustees can stream capital gains to beneficiaries. Must be included in the trust deed. Can be express power (i.e. classes of income stated in the trusts deed) or implied (trust deed empowers trustee to distribute at their discretion).
61
WHen is a trust considered a family trust?
Any time a family trust election is in force.
62
What must a family trust election nominate?
Must nominate a particular individual (test individual) who will be used to determine the "family group".
63
True or false: A family trust election can only be made at specific times
False. A family trust election can be made at any time.
64
What are the 5 main tax concessions for a family trust?
1. Trust loss measures 2. Company loss tracing concession 3. Holding period rules regulating access to franking credits 4. Trustee beneficiary reporting rules 5. Access the small business restructure rollover.
65
What tax rate applies if the family trust distributes to someone outside of a the family group?
Tax marginal rate applies. Called family trust distribution tax.
66
What is the key legislation for companies?
Corporations Act 2001
67
True or false: A company has a separate legal personality / existence from its owners.
True
68
Can a private company under the corporations act be a public company for tax purposes?
Yes. A company's status for tax purposes can be determined each year.
69
When is a company regarded as a public company for taxation purposes?
- shares listed on the ASX on last day of year or is a cooperative company. At no time did 20 people or less hold more than 75% - at all times since incorporation been a non-profit company - mutual life assurance company - friendly society dispensary - subsidiary of a public company - statutory body or government body
70
What is a private company?
One that is not a public company (ITAA97, s995-1)
71
Why does the distinction between public and private company matter?
Private companies are subject to certain extra legislation. - Payments may be treated as deemed dividends - Payments to associates may be an unfranked dividend (Div 7A) - Continuity of ownership test (COT) for tax losses is stricter for private companies - Benchmark franking rules
72
What is a Div 7A issue?
Applies to private companies only. Payments or loans from private company to a shareholder or associate may be treated as an assessable unfranked dividend.
73
What are the 3 tests of residency for a company?
1. Incorporated in Australia 2. CMC - central management and control in Australia 3. Voting power - controlled by shareholders who are residents of Australia
74
Why is residency important for companies?
Determines the liability for tax and entitlement to franking credit offsets.
75
True or false: A resident company is taxed on its total ordinary and statutory income from both Australian and International sources.
True
76
True or false: A non-resident company can claim a franking credit tax offset
False
77
Which 2 tests must a company meet to be considered a "base rate entity"?
- Aggregated turnover less than $50m - Less than 80% of assessable income from passive sources
78
What is BREPI ?
Base rate entity passive income. Company assessable income must be less than 80% BREPI to be considered a base rate entity.
79
What is included in BREPI?
- Dividends / corporate distributions and attached franking credits (voting power must be less than 10%) - Interest income - Royalty income - Gain on a qualifying security - Rental income - Net capital gains Includes DIR (dividends, interest, royalties).
80
What is the steps to reconiling accounting income to taxable income / tax payable?
Net Profit / (Loss) per accounts +/- Differences between accounting and tax income (e.g. gains on sale of assets) + Accounting depreciation - Tax depreciation + Items not allowed as tax deductions - Exempt income - Special deductions (e.g. blackhole or R&D expenditure) =Taxable income
81
When a company receives a franked distribution directly, what must they do?
Include the franking credit in their assessable income, then claim a franking credit tax offset. Franking credit tax offset is limited to the tax payable.
82
A company has a unused tax offset. Can this be refunded to them?
No. However, certain income-tax-exempt / DGR, superannuation funds, ADF's are entitled to a refund of excess franking credits.
83
A resident company receives overseas interest or dividend income with withholding tax deducted. How is this treated?
Must gross up the amount received with any withholding tax. A company can then claim a foreign tax credit.
84
If a company has excess franking credits, what does s36-55 of ITAA97 allow them to do?
Can convert the amount of excess / unused franking credits to the amount of a tax loss and carry that forward to future years. If a base rate entity, divide by 0.25 If a non base rate entity, divide by 0.3
85
For a company, when is the commissioner deemed to have made an assessment?
The date the return is lodged (even if lodged late). Notice of assessment is dated the date the return is lodged.
86
What types of entities are included under the definition of "corporate tax entities" in ITAA97 s.960-115 ?
Companies (body corporate or other unicorporated association, excluding partnerships) Corporate limited partnerships Public Trading Trusts
87
What are examples of distributions for companies?
Dividend or something taken to be so under the Act
88
What are distributions for corporate limited partnerships?
Distribution made by the partnership, in money or property, to a partner or a dividend
89
What forms can a frankable distribution take?
- Dividends - Bonus Shares taken to be dividends (6BA(1) ITAA36) - Dividends under off-market share buy-back provisions - Liquidators distributions deemed to be dividends - Non-share dividends in respect of non-share equity interests
90
What is the relevance of Division 6C under ITAA36?
Division 6C deals with public trading trusts, which attract a lower rate of tax
91
What must an entity do after they make a frankable distribution?
Provide the recipient with a distribution statement
92
What items are included on a distribution statement?
Name of the entity Date and amount of distribution Amount of any franking credit and percentage The amount of TFN withholding if applicable If unfranked, a statement to that effect
93
To be entitled to a tax offset for franking credits, what must a taxpayer be?
A qualified person in relation to the dividend
94
What 4 requirements are there to be a qualified person for franking credit offsets? (HRSF)
**1. Holding period rule** (45 days continuous) **2. Related payments rule **(shares at risk for 45 days each payment **3. Small shareholder exemption** (natural person, < $5,000 a year franking credits) **4. Franking credit ceiling** (prescribed formula as a alternative to the holding period rule)
95
True or false: If a shareholder meets the small shareholder exemption rule (i.e. less than $5k franking credits per annum) they still have to meet the Holding Period and Related Payments rules.
False. Only the small shareholder exemption needs to be met.
96
How is the maximum franking credit calculated?
Lesser of: - Amount on the distribution statement - Maximum franking allocated to the distribution.
97
98
What is the franking percentage?
Measure of the extent to which a frankable distribution has been franked. Franking credit allocated / Maximum franking credit x 100%
99
How is the tax rate (base entity or normal rate) for franking credit purposes?
Turnover for the current year is assumed to be the same as previous year. Therefore, the tax rate that applied the previous year should be used.
100
What 2 implications are there if an entity franks a distribution in excess of the maximum franking credit?
1. Entity's franking account is debited to the full extent 2. Recipient includes only the maximum franking credit in assessable income and tax offset.
101
What is the benchmark franking rule?
All frankable distributions made during the franking period must be franked to the same extent - the benchmark franking percentage.
102
What 2 factors are considered in the benchmark rule?
1. Franking period 2. Benchmark franking percentage for that period
103
How is the franking period determined?
If a private company - same as tax year. Not a private company - two periods. July to December and January to June.
104
Is a company obliged to attached franking credits to dividends?
No, however once allocated will be subject to the benchmark rule.
105
How is the benchmark franking percentage determined?
The franking percentage allocated to the first frankable distribution made by the entity within that period. No frankable distributions = no benchmark franking percentage.
106
What division covers anti-streaming integrity rules?
Div 204 - ITAA97
107
What are anti-streaming integrity rules?
Rules ensuring franking credits - are not disproportionately allocated to certain members - used to benefit members who do not have enough economic interest in the entity.
108
109
What are the 4 rules for anti-streaming?
1. Linked distributions 2. Tax exempt bonus shares 3. Members benefit more from franking than other members 4. Disclosure rules.
110
What is the disclosure rule for anti-streaming?
If entity's benchmark percentage differs substantially from prior periods. Main rule. Entities are required to disclose any significant changes.
111
112
What is a franking account?
Account that resident corporate tax entities keep track of the franking credits that it can pass on to members.
113
How do franking credits arise?
Upon payment of income tax and payg instalments, and receipt of franked distributions. Only applicable to resident entities.
114
How do franking debits arise?
Payment of franked distributions, refunds of income tax.
115
What is FDT?
Franking deficit tax.
116
When does FDT arise?
When franking account is in deficit at the end of financial year. Once FDT is paid, debit balances are not carried forward. Tax paid is an offset which van be deducted from the company's income tax return.
117
When is a franking account tax return required?
1. Company has a liability for FDT 2. Company did not meet benchmark rule 3. Triggered disclosure obligation (significant variation in benchmark between years).
118
How are concessional contributions taxed in the fund?
15%
119
How are non-concessional contributions taxed in the fund?
They are not.
120
Can a taxpayer carry forward any unused concessional cap?
Yes, for up to 5 years. Taxpayer must have a total superannuation balance of less than $500,000 at 30 June in the prior year.
121
What is the accumulation phase?
Monies are accumulating in the fund
122
How are capital gains within the superannuation fund treated?
Treated as earnings, subject to 15% tax. If held asset for more than 12 months, 33.3% discount applies.
123
How is non-arms length income in the super fund taxed?
At 45%
124
How are retirement phase benefits taxed?
If over 60 years of age, tax-free where funds are from a taxed super fund.

CPA Program Australia Taxation (7 decks)

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