Week 10 Taxation of

Companies
Tax losses, Dividend Imputation and
Franking Account

References
Chapter 21

Key Concepts
Definition of a company
Public v private
Reasons for distinction

Dividend Franking Account

Franked
Unfranked
Imputation credit

Treatment of various expenses

Loans
Excessive Remuneration
Losses

Consolidation

General Concepts
Companies lodge a tax return each year
Pay tax BAS, PAYG instalments Self
assessment no assessment issued 4 years
to amend 2 years if SBE
Flat rate of tax 30% (on every dollar)

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 any stock exchange in the world

Non profit companies
Life assurance companies
Semi Government bodies
Subsidiaries of public companies
Co op companies

Otherwise private company

Different from Corporations Act 2001 definition of public/private
company

Public - Private Company

Important differences:
Private Company: Loans to shareholders and associates Div 7A, s 109B -109ZE ITAA 36 - a loan to a shareholder
or associate is deemed a dividend unless commercial loan
arrangements
Private Company: Excessive remuneration - s 109 ITAA
36 - deemed dividend and excess not deductible to
company
Ability to claim carry forward losses

Dividend Imputation System

Franked
Dividend paid from profits that have been taxed
Therefore carries an imputation credit
Dividend can be fully or partially franked

Unfranked dividend
Dividend paid from profits that are not subject to tax (difference
between accounting and taxable income)

Partly Franked Dividend

A combination of the above

Imputation Credits
Represent how much tax was paid by the company in order to pay
a franked dividend

Companies maintain a dividend franking account to record

how much tax they have paid and therefore how much
franked dividends they can pay out.

Imputation Credit
Key to system is calculation of Imputation credit
In practice company paying you the dividend will tell
shareholder the amount of the franking credit.
Example:
If a company pays a fully franked dividend of $1,000 what
is the imputation credit
As dividend is from after tax income then the imputation
credit is calculated as:
Cash dividend x Company tax rate/(1-Company Tax rate)
=$1,000 x 30%/70% = 429
Proof:
Company income is $1,000 +$429 = $1,429 x 30% = tax
of $429 leaves a dividend of $1,000

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

Example
Old system
Company Taxable income
Tax at 34%
Net after tax profit paid as div

100
34
66

Tax in hands of shareholder

Taxable income
Tax at 60%

66
40

Total tax on $100

$74

Example of new system

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

100
30
----70
30
70
30
100

Example - cont
Shareholder pays tax at 46.5% (income over $180,000)
Tax on 100 x 46.5 = $46.50
Tax payable - $46.50
Less: tax offset $30 - imputation credit
Tax to pay by shareholder - $16.50
Total tax paid on profit = $30 company + $16.5 individual
= $46.50

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
Treatment by shareholder is the same whether
shareholder is a company, trust, partnership or super
fund

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

Franking Rules
Companies can frank to any percentage benchmark rule
Benchmark Rule - all dividend must be franked to same
percentage during income year, but does not apply to
public companies
Example:
Private company pays a dividend of $140,000. The
maximum franking credit is $60,000. If company attaches
a franking credit of $30,000, it is franking to 50%. This
sets the franking percentage for the rest of the year on any
other dividends declared to 50%
Penalty for breach - franking percentage differential - to
stop companies retaining franking credits
Can not over frank as may be liable for franking deficit tax
and franking additional tax

Franking Account
Credits
from PAYG instalments and tax payable
Receives a fully franked dividend credit for franking
attached to dividend

Debits
Refund of income tax
Payment of franked dividend
Franking deficit tax

Objective is to have nil or credit balance at end of

year

Example of movements in the Franking

Account
Date
Activity Debit($) Credit($)
1/7/14 Opening Balance 3,000
28/7/14 Payment of 4th quarter
tax instalment of $6,000 6,000
9,000
30/9/14 Fully franked dividend
of $21,000 received
Credit = 21,000 x 30/70 = 9,000 9,000
28/10/14 Payment of 1st quarter
tax instalment of $9,000 9,000
27,000
28/2/15paymentof2ndquarter
taxinstalmentof$9,000 9,000
36,000
22/6/15 Payment of fully-franked
dividend of $14,000.
Debit = $14,000 x 30/70 6,000
30,000
30/6/15 Closing balance (opening

balance on 1 July 2015)

30,000

Balance($)

18,000

Impact on Shareholders
Shareholders need to include as part of income the
imputation credits and then claim as a tax offset the
imputation credit
The gross up of the income for the imputation credit needs
to be done for all shareholders.

Example

Individual
Cash Dividend $700
Imputation Credit $300

Tax rate
Cash Dividend
Imputation credit
Taxable Income

Tax payable
Less Imputation
credit
Tax (refund)/payable

0%
700
300
1,000

19%
700
300
1,000

0
300

190
300

(300)

(110)

32.5% 37% 45%

700
700
700
300
300
300
1,000 1,000 1,000
325
300

370
300

450
300

25

70

150

Example of Company as a shareholder

Taxable Income
Business income
Franked Dividend
Cash
Imputation Credit

20,000

Taxable Income

30,000

Tax Payable at 30%

Less Imputation Credit

9,000
3,000

Net tax payable

6,000

7,000
3,000

Example of Company as a shareholder

calculating how much loss it can claim
Assume that the company has carry forward losses of $35,000
Taxable Income
Business income
Franked Dividend
Cash
Imputation Credit

20,000
7,000
3,000

Taxable Income

30,000

Less losses of
Taxable income

35,000
(5,000)

Tax Payable at 30%

Less Imputation Credit

0
3,000

Net tax payable

nil
Net benefit of imputation credits lost therefore can only claim loss of $20,000 and still no tax
payable

Example continued
If only claim loss equal to income other than franked dividends then
As in example above
Taxable income is
$30,000
Less loss of
Taxable income
Tax at 30%
Less Imputation credit
No tax payable
Loss to carry forward of $15,000

$20,000
$10,000
$3,000
$3,000

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

Distribution - Dividends
Company - return to shareholder
dividend, s 44
Loan or benefit to shareholders/associates deemed dividends Div 7A
Section 109 excess payments by private
companies to associates to be dividends and
are assessable to recipient and non
deductible to company

Loans Division 7A
Payments by company to
shareholder/associate
Payment includes transfer of property,
crediting of account
Loans not repaid by the end of the current
year and loan made on basis of being a
shareholder
Forgiveness of debt

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 Directors can rescind that
decision at any time.

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
Net exempt income can reduce losses offset or carry
forward

First Test Continuity of

Ownership Test

Division 36 and Division 165, ITAA 97

Section 165-13 and deduction under s 36-17.

Conditions:
Same persons own the same shares that gave them more than 50%
of the
Voting power,
Rights to dividends,
Rights to capital distribution

Ownership test must be met from the time the loss was
incurred all the way through to when the loss is utilised
(covers intervening income years)
Can trace through company shareholding (alternative test)

Example 1

In the loss year the shares of Company X were owned by:

A 12%
B 40%
C 48%
In year 3 , Company X has taxable income and wants to use up the
losses. Since the loss year the share holding has changed to:
A 64%
B 23%
C 13%
As the same shareholders owned more than 50% of the shares in the
loss year and the income year as well as the intervening year Company
X can deduct the prior year loss.

Example 2
Assume the same shareholding as in Example 1 but that in
year 3 the shareholding is:
A 40%
BD Pty Ltd 60%
B and D own 50% each of the company
Where there is an interposed company the alternative test
applies which is:
Is it reasonable to assume that there are people that are able
to:
Control the voting power,
Get more than 50% of the dividend and
Get more than 50% of the capital
If satisfied then meet the Continuity of Ownership Test

Second Test Same Business Test

if not same owners, must have carried on same business,
no new or additional business
Test is that
The company carries on the same business as it did
immediately before the change in majority ownership
occurred at all times in the income year where there are
prior losses and at all times in the year where there are
current losses
The company must not derive income from a new kind of
business or transaction,
Start a business or initiate a transaction to meet the same
business test
If income is greater than $100m then does not need to meet
the same business test
Same business test is set out in TR 1999/9

Examples of the Same Business Test

A company carried on the business as a dealer in
motor parts and accessories. After the change in
ownership it did the same business but under
another name, at a different place with different
directors and employees with different stock and
plant in conjunction with a dealer having a
different franchise
Did not meet the SBT (Avondale Motors case)

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.

Examples of SBT
A company carried on the business of
distributing and installing swimming pools
was not the same as a business of
manufacturing , selling and installing the
pools

Company losses
Company can determine the amount of the tax
losses they can in an income year to avoid losing
imputation credits
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

Consolidation
Effective from 1/7/02
Group companies can elect to be treated as
one company for tax purposes
Holding company must elect to consolidate
Benefit is one tax return and subs treated as
divisions of the holding company