Tax Facts

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  • Important for 2018 company tax returns & dividends - new rules about 27.5% rate

    In brief:    Parliament has finally passed the new rules about which companies qualify for the 27.5% tax rate. And these rules operate retrospectively from 1 July 2017, so apply to 2018 company tax returns and franked dividends paid in the 2018 year of income. It is no longer relevant whether or not a company carries on business – the only 2 criteria are that the company’s aggregated turnover is below the threshold ($25M for the 2018 year and $50M for 2019) and that no more than 80% of the company’s assessable income comprises ‘passive income’.

    More:    Passive income for this purpose is defined as:

    • distributions by corporate tax entities (but not dividends to a company holding voting rights of 10% or more in the company paying the dividend);
    • franking credits on those distributions;
    • non-share dividends from companies;
    • interest income (but not for banks and other specified financial institutions), royalties and rent;
    • gains on qualifying securities;
    • net capital gains; and
    • to the extent referable to any of the above, amounts included in the assessable income of a partner from a partnership or beneficiary from a trust.

    The test must be applied for each income year, so the tax rate for a company may change from year to year.

    So too for the tax rate used to calculate the maximum franking credits that may be applied to dividends. However, the tax rate for that calculation must be determined on the assumption that the aggregated turnover, passive income and assessable income are all the same as for the previous year of income. And, if the company did not exist in the previous year, then maximum franking credits must be based on the 27.5% rate.

    For the ATO’s draft guidance, see Draft Law Companion Ruling LCR 2018/D7 and Draft Practical Compliance Guideline PCG 2018/D5. (Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018)

    ... Read More

    31 Aug 2018

    Topic: Income tax

  • Further concession for Division 7A sub-trust arrangements maturing in 2019

    In brief:    Presumably because of the deferral of proposed amendments to Division 7A, now aimed to commence from 1 July 2019, the Commissioner has extended the additional concession for maturing sub-trust arrangements to those maturing in the 2019 year of income. So those using the 7 year term under Option 1 in PS LA 2010/4, and which term expires in the 2019 year of income, will be able to effectively extend repayment by putting in place a complying 7 year loan ‘between the sub-trust and the private company beneficiary prior to the private company’s lodgement day’ for the 2019 year.

    More:    This extension has been incorporated into Practical Compliance Guideline PCG 2017/13, which now applies to sub-trust arrangements maturing in the 2017, 2018 and 2019 years of income. That is, the amended Guideline applies to Option 1 arrangements entered into prior to 1 July 2012.

    The proposed amendments to Division 7A stem from the Board of Taxation’s post-implementation review of Division 7A, provided to the Government in November 2014. They were announced in the 2016-17 Federal Budget, but full details have not yet been released. (Practical Compliance Guideline PCG 2017/13)

    ... Read More

    31 Aug 2018

    Topic: Income tax

  • Thomas' case - Commissioner successful in the High Court

    In brief:    In a unanimous decision from all 7 Justices of the High Court yesterday, the Commissioner has ultimately succeeded on the main, substantive issues in Thomas’ case. The trustee of a discretionary trust had purported to distribute franking credits to beneficiaries independently from, and in different proportions to, the relevant franked dividends. It is a complex case, but the controversies for the purposes of the appeal were mainly whether the court was bound by directions from the Supreme Court of Queensland to the trustee of the trust under s 96 of the Trusts Act 1973 (Qld) about the effect of the trust distributions and, if the court was not so bound, the proper application of the imputation provisions to the distributions. It was held that the directions from the Supreme Court did not bind the court (nor the Commissioner) in the proper application of tax laws.

    More:    The decision makes it plain ‘that the statutory notional allocation of franking credits to beneficiaries follows the proportions which have been established with respect to their notional sharing in franked distributions’ [para 16] – that is, franking credits cannot be distributed separately from the franked dividends to which they are attached.

    The High Court appears also to have finally laid to rest the notion that franking credits represent a species of property able to be dealt with as such by a trustee. The trust deed in this case did not have provisions attempting to facilitate separate dealings in franking credits but, in statements apparently intended to be of general principle, the members of the Court said that ‘… franking credits – exist[s] neither in nature nor under the general law’ (Gageler J [97]) and ‘The [assumption that franking credits can be dealt with separately] involves the notion that franking credits are discrete items of income that may be dealt with or disposed of as if they were property under the general law. That notion is contrary to the proper understanding of [the imputation provisions]. Franking credits are a creature of its provisions; their existence and significance depend on those provisions.’ (joint reasons of the other 6 Justices [9])

    The Commissioner will no doubt regard those statements as supporting his views in Draft Ruling TR 2012/D1 relating to ‘notional amounts’ of trust income (see, particularly, para 112-115 in relation to franking credits). If franking credits do not constitute property under the general law, then they cannot form part of a trust fund and nor can a trustee be liable to account to beneficiaries for franking credits (although trustees in a sense do have indirect obligations, needing to take into account the impact of distributions on franking credit entitlements under the tax law). This makes income equalisation clauses in trust deeds even more problematic (those clauses will in many cases not work effectively anyway). And practitioners who include franking credits in the financial statements of trusts need to think carefully about the risks that doing so potentially create for getting the numbers wrong in the proper recording of the distributable income of the trust, beneficiaries’ entitlements to that income and consequent proportional franking credit implications. (FC of T v Thomas [2018] HCA 31)

    ... Read More

    09 Aug 2018

    Topic: Income tax/Trusts