Indian companies are taxable in India on their worldwide income, irrespective of its source and origin. Get more details at http://www.helpwithassignment.com/

1. Topic 9 – Taxation of Companies
and Superannuation
Dividend imputation, tax losses,
consolidation, franking account
Chapters 19 and 16

2. General Concepts
• Companies lodge a tax return each year
• Pay tax – BAS, PAYG instalments
• Sales x instalment rate – set by ATO
• Self – assessment – no assessment issued –
4 years to amend – 2 years if SBE
• Flat rate of tax – 30% (on first dollar)

3. Definition of a Company s 995-1
• A body corporate; or any other
unincorporated association or body of
persons; but
– Not a partnership, or non-entity joint venture
• Public company – listed on ASX
• Otherwise private company
• Different from Corporations Act 2001

4. Residence of Company
• Statutory and Common Law definitions
• S 6(1), ITAA 36 – incorporated in Australia
• If not, carries on business in Australia
– central management and control,
– voting control by majority of Australian
residents

5. Taxation Treatment
• Income – s 6-5 and s 6-10, ITAA 97 – taxed on
worldwide income
• Deductions – s 8-1, similar to all taxpayers
• No rebates but tax offset for imputation credits,
PAYG instalment credits and foreign tax credits.
• Distributions – dividends – s 44, ITAA 36
• Substituted Accounting Period and public officer,
responsible for all taxation matters

6. Company Losses – Division 36 and
Division 165, ITAA 97
• Losses - two tests - continuity of business and
continuity of ownership
• Section 165-13 and deduction under s 36-17.
• must have same owners and control throughout
loss year
• if not same owners, must have carried on same
business, no new or additional business
• Can be carried forward indefinitely

7. Company Loss Tests
• Test introduced to prevent tax avoidance through
tax loss company trading
• ownership can be traced back through a group of
companies
• same business test requires no income to be
generated from any other type of business
• Grouping of losses - 100% subsidiary, now
consolidation from 1 July 2003

8. Company losses
• Capital losses - same tests apply
• Foreign losses - cannot be used to offset
Australian income, carried forward to offset
foreign profit
• Bad debts - must satisfy loss tests.
• Deductible under s 25-35, ITAA 97

9. Avondale Motors (Parts) v FCT
• What is required in order to satisfy the continuity
of business test to claim carry forward losses?
• Ownership very easy, but continuity of business
requires the same business, an identical business.
• High Court – must be identical business and not a
similar business. Company was bought because of
the losses. The new business changed the name of
the company but the business activities were not
identical.

10. Capital Gains Tax
• Income tax on capital gain - no separate tax
• Post 20 September 1985 - CGT applies
• Pre-CGT asset in company- majority underlying
interest - test day (5 yrs)
• Post 21 September 1999 - no indexation or
averaging - discount method (50% individuals),
Companies no discount
• Asset purchased prior to 21 September 1999, can
still use indexation.

11. Pre CGT - Assets and Shares
• Designed to bring pre – CGT assets within
the CGT regime
• Section 149-30 – assets owned by the
company, 50% of shareholders
• Test day – 5 years and must be assessed
within 6 months.
• Abnormal trading in companies shares can
create a problem for public companies

12. Pre CGT status
• Pre CGT shares in a company – cannot use
the company to avoid income tax by selling
post-CGT assets in the company
• Section 104-230 - If post CGT assets
acquired greater than 75% of net value of
the company, then CGT liability occurs
when the pre-CGT shares are sold.

13. Group Companies
• Transfer losses
• Rollover assets - no CGT implications
• Ability to transfer foreign tax credits from one
group to another
• Consolidation optional for the company group, but
effective from 1 July 2002
• Script for script rollover relief - 80% of shares,
units and options acquired

14. Distribution - Dividends
• Company - return to shareholder – dividend, s 44
• Trust - return to beneficiary - distribution
• Public trading trust - trust dividend (taxed as a
Company)
• Deemed dividends - private company - excessive
remuneration
• Loan or benefit to shareholders/associates -
deemed dividends

15. Brookton Co-Operative Society v FCT
• When is a dividend paid – when it is
declared by the Directors or distributed to
the shareholders?
• The dividend is only paid and treated as
income in the hands of the shareholder
when actually paid and not just declared by
the Directors. The Director’s can rescind
that decision at any time.

16. Dividend from Foreign Company
• Non-portfolio dividend - holds more than 10% - dividend
exempt from tax in Australia- s 23AJ - ITAA 36
• Exempt dividend does not offset other losses of company
• Ordinary foreign dividend - subject to tax in foreign
country (DTA) and included in assessable income in
Australia
• Tax credit for foreign tax paid
• Withholding tax - 30% or 15% (DTA)

17. Dividend Imputation
• Company tax imputed to shareholder -
avoids double taxation
• I July 1987 introduced in Australia
• Company pays a franked dividend with
franking credits from franking account
• Franking account - credits for tax paid and
debits for dividends paid
• Excess franking credits – refunded, Div 67

18. Example
Company level
Taxable income 100
Less: Company tax 30% 30
-----
Net corporate profit 70
Franking credit - franking account 30
Shareholder level
Fully franked dividend 70
Imputation credit 30
Gross up – included in assessable income 100

19. Example - cont
Shareholder pays tax at 46.5% (income over $150,000)
Tax on 100 x 46.5 = $46.5
Tax payable - $46.5
Less: tax offset $30 - imputation credit
Tax to pay by shareholder - $16.5
Total tax paid on profit = $30 company + $16.5 individual

20. Example of Individual receiving a dividend
• Individual shareholder receives a 100% franked
dividend of $10,000. The following amount is
included in assessable income –
• Dividend - $10,000
Plus imputation credit: dividend x 30/70 (gross
up) = $4,285
• Gross dividend included in Assessable income
= $14,285

21. Example of Individual receiving a partly
franked dividend
• Individual shareholder receives a 50% franked
dividend of $10,000. The following amount is
included in assessable income –
Dividend - $10,000
• Plus imputation credit:
• Dividend x 30/70 (gross up) x 50% = 2,142
• Gross dividend included in Assessable income
= $12,142

22. Franking Rules
• Companies can frank to any percentage –
benchmark rule
• Benchmark Rule - all dividend must be
franked to same percentage during income
year
• Penalty for breach - franking percentage
differential - to stop companies retaining
franking credits

23. Franking Account
• Credits from PAYG instalments
• Pays income tax - credit
• Receives a fully franked dividend – credit
for franking attached to dividend
• Debit from using franking credits
• Franking deficit tax

24. Example of movements in the Franking
Account
Date Activity Debit($) Credit($) Balance($)
1/7/04 Opening Balance 3,000
21/7/04 Payment of 4th
quarter
tax instalment of $6,000 6,000 9,000
30/9/04 Fully franked dividend
of $21,000 received –
Credit = 21,000 x 30/70 = 9,000 9,000 18,000
28/10/04 Payment of 1st
quarter
tax instalment of $9,000 9,000 27,000
22/6/05 Payment of fully-franked
dividend of $14,000.
Debit = $14,000 x 30/70 6,000 21,000
30/6/05 Closing balance (opening
• balance on 1 July 2005 21,000

25. Dividend Streaming
• Dividend imputation only of value to a resident
shareholder.
• Companies want to pay franked dividends to
resident shareholders only
• Companies want to pay unfranked dividends to
non-resident shareholders
• Dividend streaming caught by Div 204 - ITAA 97
• Non-resident shareholders paid from foreign profit
• Bonus shares - return of capital

26. Anti -Avoidance Measures
• Part IVA, ITAA 36 - tax avoidance
• Cannot trade franking credits or stream dividends
• 45 day holding period - must hold shares at risk
for more than 45 days in order to claim franking
credits and 90 days for Preference shares
• De minimis rule – 45 day (90 day) only applies if
more than $5,000 value of tax offset claimed using
franking credits

27. Specific Anti-avoidance – Div 7A
• Designed to prevent tax free loans being paid to
shareholders or associates of shareholders.
• Deems the payments to be unfrankable dividends
– payments (former s 108, ITAA 360, loans and
forgiveness of debts.
• Loans will not be caught if – in writing,
commercial interest charged (usually FBT interest
rate), and repaid within 7 years unsecured or 25
years if secured over land by a mortgage.

28. Consolidation
• Introduced where a group of companies
• To reduce compliance costs - one tax
return, BAS, and PAYG instalment
payments
• Intra-group transactions ignored
• Losses, franking credits and foreign tax
credits pooled
• CGT not applicable in moving assets,
shares

29. Superannuation – Chapter 16
• Superannuation fund a form of trust
• Contributions and income taxed at 15%
• CGT discount of 33.3% - taxed at 10%
• Complying fund – complies with SIS Act
(Superannuation Industry (Supervision) Act
1993)
• Non-complying funds taxed at 46.5%

30. Specific Issues
• Public offer funds – APRA supervision
• Self-managed funds (SMSF) – ATO supervision
• Maximum number of members – 4
• Issues of ‘sole purpose’ test – Swiss Chalet case
• Investment plan
• Fund can borrow but subject to strict requirements
• Only 5% for ‘in-house’ assets

31. Taxation of Superannuation
• Superannuation Industry (Supervision) Act
1993 (Cth) – duties and obligation of
trustees and the manner of investment of the
fund.
• All eligible employees in Australia earning
more than $450 per month have an amount
representing 9% of their salary/wages paid
into a fund.

32. Taxation
• Generally contributions are tax deductible for the
employer called concessional contributions, taxed
at 15%.
• Non-concessional contributions paid in by the
employee not taxed in the fund. Note salary
sacrifice contributions still subject to 15% tax.
• All contributions and earnings are tax free on
retirement once the member has reached the age of
60 years - NANE.

33. Simplified Superannuation
• Tax Laws Amendment (Simplified Superannuation) Act
2006.
• New law to apply from 1 July 2007: if over 60 years of age
when retire superannuation benefits tax exempt and not
assessable - NANE.
• Under 60 years, taxable but with rebates on pensions.
• Concessional contributions limited to $50,000 per year per
person. A 5 year transitional cap for those over 50 years at
$100,000 until 2011/2012 year.
• Limits on non-concessional amount contributed - $150,000
per year or $450,000 every 3 years.

34. Other issues
• Self-employed will be able to claim a full
tax deduction for contributions.
• Employees up to 75 years of age can have
deductible contributions made by their
employer. If over 75 years only 9% SGC.
• RBL’s – Reasonable Benefit Limits
abolished. Cap on contributions will act as a
control on the amount contributed.

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