COMPANIES - CHAPTER 15 MTG 3-000 to 3-005

1. 1 COMPANIES - CHAPTER 15 MTG 3-000 to 3-005 ITAA97 s995- 1 defines a company as:- A body corporate or any other unincorporated associations or body of persons, but not a partnership. Residency MTG 30-010 ITAA97 s6-5;6-10 Determining residency is important because: Australian resident companies are liable to tax on total income from sources both in and out of Australia, whereas foreign resident companies are liable only on Australian source income and other income that the Act specifically includes. Imputation system applies to dividend paid by Australian residents Various CGT concessions Consolidation regime available to resident companies only Special rules apply in determining income from foreign resident companies

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3. 3 PUBLIC VS PRIVATE COMPANY STATUS  UNDER TAX LAW” MTG 3 - 015 Importance of determining Status: ITAA97 s995-1(1) Certain payments made by private companies to associated persons may be treated as a dividend and disallowed as a deduction Continuity of ownership tests are not as strict for public companies Private company Is defined as not being a public company for the income tax year

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5. 5 RECONCILIATION STATEMENT MTG 3-048

6. 6 RECONCILIATION STATEMENT ITEMS MTG 3-048 Difference between accounting income and income for tax purposes Insurance recoveries for livestock – spread over equal installments over 5 years Difference b/w net capitol gain – c/fwd losses, CGT concessions Accounting profit/ loss on disposal of assets – balancing adj Depreciation charged in the accounts vs. Depreciation allowable Different methods – STS, low value pools Items not allowed as deductions Provisions for doubtful debts Provision for employee entitlements Non deductible donations Non deductible legal expenses Amortisation of goodwill Net Exempt income Income specifically exempted for tax e.g.. Demerger dividends Special Deductions & and other items (to extent not deducted in accounts) Special mining , quarrying and petroleum deductions Prior year losses Losses transferred from another company in the same group Environment protection or impact study deductions Primary production concessions – telephone lines, water facilities Capital expenditure on buildings and structural improvements Mains electricity connection Investment in Australian films R & D

7. 7 IMPUTATION SYSTEM MTG 4-400 System applies to dividends paid by Australian resident companies to Australian resident shareholders. Basis of the imputation system of company taxation is that shareholders who receive assessable dividends from a company, must include the gross amount in there assessable income, but they are also entitled to an offset for the tax paid by the company on its income Tax paid at the corporate level is allocated to members by way of imputation credits attached to the dividend they receive (franked). Tax paid and tax imputed to members is recorded in the corporate tax entity's franking account.

8. How to calculate a Franking Credit As the company income tax rate is 30%, if a fully franked dividend is received, without the amount of franking credit being disclosed, the following formulae is used to ascertain the franking credit:- Net Dividend x 30/ 70 Eg:- George received a fully franked dividend of $1,400. Therefore the franking credit would be $1,400 x 30/70= $600 A dividend may also be unfranked.(No tax has been paid by the company on the dividend received). Unfranked dividends are also assessable to the shareholder. 8

9. 9 FRANKING ACCOUNTS Companies must keep a record of their franking credits so they can be shown on the dividend statements. This record/worksheet is known as a Franking Account as is shows a running tally of the company's franking credits. Franking credits MTG 4-710 The main reasons a credit to the entity’s franking account arises are:- - the entity pays income tax (including PAYG instalments), - receives a franked dividend, or - company incurs a liability to pay a franking deficit tax. Franking debits MTG 4-720 The main reasons a debit to the entity's franking account arises are - the entity franks a dividend, or - receives a tax refund Franking Account Deficit Where the tax entity has a franking account deficit at the end of a year, it is required to pay a franking deficit tax equal to the amount of the deficit.

10. Example of Recording Movements in Franking account Where the corporate tax entity has a franking account deficit at the end of a year it is required to pay franking deficit tax equal to the amount of the deficit 10

11. 11 DEEMED DIVIDENDS UNDER  ITAA36 s.108 & S. 109MTG 3-240 to 3-250 Div 7A contains anti avoidance provisions designed to prevent tax free distribution of private company profits on/after 4 Dec 1997 in the guise of: Amounts paid by a company to a shareholder or shareholders associates (s.109C). Payments include transfer of property for less than market value Amounts lent by the company to a shareholder if the loan has not been fully repaid by year end (s 109D) The outstanding balance in respect of an ‘amalgamated loan’ (one or more) where the loan has not been repaid in the year originally made and the required minimum repayment has not been made in the relevant year (s.109E) Amount of debts forgiven which were owed by a shareholder associates to the company (s109 F)

12. 12 DEEMED DIVIDENDS UNDER ITAA36 s.108 & S. 109 - cont MTG 3-240 to 3-250 A deemed dividend can also arise where a private company pays or credits the following amounts to an associated person; Remuneration for services rendered Retirement or termination allowance or gratuity or compensation; where the commissioner considers that amount to exceed what is reasonable. The excess is not deductible to the company s.(109) Advances made by a private company to “associated persons” are deemed to be dividends to the extent the Commissioner considers that they are distributions of profits (s.108 ) S 108 may also apply to loans that were in existence when Div 7A was introduced 4 Dec 1997

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