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Lecture 10

Lecture 10 - Taxation of Investments and Tax Planning

5 Pages
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Department
Accountancy
Course Code
AYB250
Professor
All

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LECTURE 10 – TAXATION OF INVESTMENTS AND YEAR END TAX PLANNING Dividend Imputation System  Dividends are paid out of profits.  Companies must keep a franking account. o If the company pays company tax, the dividend is then franked.  Shareholders receive a credit for the tax paid and only pay the difference on their marginal tax. o Unfranked dividends do not receive a credit and are taxed at the full marginal rate. Paying Tax on Dividends  A recipient of a franked dividend includes the franking credit in their assessable income and receives an offset to reduce tax payable. o This is called the gross up and credit (or gross up and offset) mechanism.  If the dividend is not fully franked then the shareholder grosses up and credits only to the extent of the franking percentage.  To get the grossed-up amount: Franked dividend x 100/(100 - imputation rate)  To get the imputation credit: Franked dividend x imputation rate/(100 - imputation rate) WORK EXAMPLE ON SLIDE 8,9,10 HERE Taxation of Investment Income Cash and fixed interest  Interest is taxed at the taxpayer’s marginal rate.  Interest on borrowings can be offset against the interest earned when the money is invested. Interest bearing securities  Securities when transferred may have capital gains and losses.  If securities are traded, then costs and losses will be deductions while profits are assessable. Property  Can be held directly or indirectly through collective investments (unit trusts).  Assessable income: o Property returns rental income and o Capital gains  Deductions include: o Borrowing expenses; o Owner-supplied power, gardening; o Interest on money borrowed to o Accounting and tax fees; insurance, purchase or repair the property; legal fees o Bank charges, water rates, land taxes; o Advertising; o Certain repairs; cleaning, replacement o Real estate agent fees of goods supplied; Australian shares  The return on shares is by dividends and capital gains – this is reflected in the price of the share.  Franking of dividends makes investment in shares worthwhile – imputations credits reduces taxes. International investments:  Income from overseas sources is subject to Australian tax but tax offsets are given for foreign tax paid.  Australia has double tax agreements with most nations to avoid double taxation Taxation of Entities Companies  Separate legal entity;  Pays its own tax at a flat rate of 30%.  Cannot claim a discount for capital gains  Provide limited liability to shareholders  Can either retain profits or distribute profits to shareholders in the form of dividends Partnerships  Not a separate legal entity  Must lodge a tax return but does not pay tax in its own right o Partners pay tax on their share of income o Losses can be distributed to partners o “Salaries” paid to partners are treated as profits  Does not offer limited liability Trusts  Not a separate legal entity  Ownership is split between legal ownership (trustee) and equitable ownership (beneficiaries) o The trustee controls the operations of the trust o Trustee can be either natural person (s) or a corporate trustee  Rules set out by the trust deed  Different types of trusts: discretionary trusts, fixed trusts, discretionary trusts or public trusts o In a discretionary trust, the trustee has discretion as to whom the profits or capital will be distributed  Discretionary trusts allows flexibility of distribution among family members - very popular because it offers the possibility of income splitting o In a fixed trust, beneficiary have fixed predetermined entitlement to the trust capital (corpus) and profits o In a unit trust, the beneficiaries’ entitlement is represented by units which are shares of the trust estate equity  Most managed investment funds have adopted a unit trust structure  Tax is paid by beneficiaries on distributions to which they are entitled  Losses cannot be distributed out of the trust TRUST DIAGRAM SLIDE 20 HERE Public Offer Unit Trusts  Unit trusts pool the funds of investors (beneficiaries) into a trust and profits are ultimately distributed to those investors as beneficiaries using the trust mechanism.  The fund is divided into units, which can rise or fall in value.  Note the timing issues required in receiving a distribution: money invested may be returned as income and become taxable  Unit holders are liable for capital gains on redemption and sale of their units. Small Business Tax Concessions  A range of tax concessions including deferrals, reductions and exemptions are available to small businesses. The process has been streamlined and accesses a range of tax advantages from income tax, GST, CGT and FBT.  The CGT exemptions available are: o CGT 15-year asset exemption; o CGT 50 per cent active asset reduction; o CGT retirement exemption; o CGT rollover. Taxation Administration  The ATO is the executive body and collects all Commonwealth taxes.  The Commissioner is the Chief Executive who reports to the Government, administers the Act, and can delegate powers. Tax File Number (TFN)  Individuals must have a TFN and may have an ABN if conducting a business.  Enterprises dealing with an individual without a TFN, may need to withhold tax. PAYG Taxation  Pay-as-you-go (PAYG) applies to individuals, sole traders, companies, partnerships, trusts and superannuation funds, operating businesses, non-profit organisations and government agencies.  Tax must be withheld by the employer when determining wages. o Taxes collected must be remitted to the ATO Public, Private and Product Rulings  The ATO does not make the law, it administers the law.  The ATO may interpret the law and give an opinion called a ruling. o Private rulings: apply to individ
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