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Re: Base Rate Entity's Reduced Company Tax Rate and Imputation Credit

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Enthusiast

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Hi

 

I understand that the base rate entity's company tax rate will be progressively reduced to 25% in 2022 financial year.

 

Let's say :

- company is the base rate entity

- company paid the tax at 27.5% in 2019 Financial year for the profit of $100,000 ($27,500 Franking Credits)

- if that profit after tax $72,500 has been retained within the company for 3 years and only distrbute to the sharesholder in 2022 FY, the franking credit that can be attached to the dividend would be $72,500/75%*25% = $24,166. 

 

I am just wondering how any excess franking credit ($3,333) left in the company's franking account should be dealt with from the tax point of view. If that excess franking credit cannot eventually be transferred to the shareholder, it seems quite unfair, especially for the sole shareholder of the company. 

 

Hope someone can share your knowledge in this area. 

 

Thanks. 

 

Regards, 

 

PinkyT

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Devotee Registered Tax Practitioner

Replies 2

I am not aware that distributable surplus can be increased by revaluation of assets. 

 

Distributable surplus is a term for Div 7A calculations.  

Revaluation to fair value simply creates an unrealised gain that feeds thruogh th P & L to shareholers funds. 

If you want to pay a dividend, then you need to have shareholder funds to pay it from.

The result is turning "income" not taxable in the company into a taxable dividend.

Therefore, you would only do this if shareholder had little or no income so that the imp credit would be refundable.

 

 It means that there is a franking credit loss of $2.67

It means that the company retains  27 - 24 = 3 in the franking account to carry forward.

 

 

As the franking credit is refundable tax offset, it don't think it will depend on the marignal tax rate of individual. 

 

Paying a franked dividend increases taxable income.  Once taxable income is over $37 K, the marginal rate is 34.5%, incl M levy,

so individual actually pays more tax than if no franked dividend at all.

 

I do not recommend dividends from companies unless:

1.  members net tax position is improved, or

2.  a dividend is needed to fund a Div 7A loan repayment.

 

If the company is later wound up, and imp credits are all lost, members have really lost nothing if paying dividends would have made them pay more tax.

 

 

 

 

 

 

5 REPLIES 5
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Devotee Registered Tax Practitioner

Replies 4

If that excess franking credit cannot eventually be transferred to the shareholder, it seems quite unfair, especially for the sole shareholder of the company. 

 

A lot of things about tax can be considered unfair.

 

This particular issue is only a problem if the individual receiving the dividends has a taxable income low enough to receive a dividend without paying additional tax e.g. under $ 38 K.

 

Directors desparate to get franked dividends out can always revalue assets, then pay a dividend out of the higher P & L Appropriation account.

 

 

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Enthusiast

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Hi Bruce4Tax, 

 

Hmmm. Interesting to know. I am not aware that distributable surplus can be increased by revaluation of assets. 

I think this issue could possibly be a problem for ALL individual (sole) shareholder (regardless of their income bracket). 

E.g., for $100 distributable profit, 

The company paid the tax of $27.5 in 2019 FY. (Profit after tax : $72.5)

The shareholder will receive franked dividend and claim franking credit in 2020 FY. At that time, franking credit that can be distributed is limited to $24.83 (i.e., $72.5/75%*25%) . It means that there is a franking credit loss of $2.67 if we consider company and shareholder as a whole. As the franking credit is refundable tax offset, it don't think it will depend on the marignal tax rate of individual. 

 

 

 

 

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Best answer

Devotee Registered Tax Practitioner

Replies 2

I am not aware that distributable surplus can be increased by revaluation of assets. 

 

Distributable surplus is a term for Div 7A calculations.  

Revaluation to fair value simply creates an unrealised gain that feeds thruogh th P & L to shareholers funds. 

If you want to pay a dividend, then you need to have shareholder funds to pay it from.

The result is turning "income" not taxable in the company into a taxable dividend.

Therefore, you would only do this if shareholder had little or no income so that the imp credit would be refundable.

 

 It means that there is a franking credit loss of $2.67

It means that the company retains  27 - 24 = 3 in the franking account to carry forward.

 

 

As the franking credit is refundable tax offset, it don't think it will depend on the marignal tax rate of individual. 

 

Paying a franked dividend increases taxable income.  Once taxable income is over $37 K, the marginal rate is 34.5%, incl M levy,

so individual actually pays more tax than if no franked dividend at all.

 

I do not recommend dividends from companies unless:

1.  members net tax position is improved, or

2.  a dividend is needed to fund a Div 7A loan repayment.

 

If the company is later wound up, and imp credits are all lost, members have really lost nothing if paying dividends would have made them pay more tax.

 

 

 

 

 

 

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@Bruce4Tax 

 

Excellent explanation! Thanks for sharing your knowledge. It is really appreciated. 

ATO Certified

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Hi @PinkyT,

 

Thanks for getting in touch!

 

Further to the information @Bruce4Tax has provided, in order to pay a franked dividend, there is not required to be a quarantining of the credit to payment to a shareholder out of the particular year’s profit from which the credit arose.

 

Neither is there required to be a confining of a payment of a dividend in respect of that year’s taxable income - under current company law rules. Under current company law rules, a dividend can be paid as long as it does not affect the solvency of the company. Such a dividend will be frankable to the extent that the net assets exceed share capital and the transaction is not debited to a share capital account. You can find more information in TR 2012-5.

 

This means that an increased ability to pay dividends can arise even if the company made no taxable profits and paid no tax for three years. For example, an increase in the value of the company’s underlying assets might make payments of larger dividends more possible than otherwise. If the decision is made to pay a dividend to the extent of the unused franking balance, then after three years there will likely be a range of transactions impacting on the franking account. Even if the balance of the franking account after three years was exactly $3,333 the company could decide at that time whether or not it was possible under company law to pay a dividend that could be franked  to the corresponding amount to the shareholder. 

 

You can find an explanation of the range of transactions that can impact a company franking account on our website.

 

Thanks, JodieH.