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
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.
Can be held directly or indirectly through collective investments (unit trusts).
o Property returns rental income and
o Capital gains
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;
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.
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
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
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
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
o In a unit trust, the beneficiaries’ entitlement is represented by units which are shares of the trust estate
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
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
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.
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