ACCT2331 Chapter Notes - Chapter 20: Dividend Imputation, Turnbull Government, Double Taxation

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15 Jan 2019

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Taxation of dividends depends on: nature of distribution, kind of company and shareholder involved. Imputation system to prevent double taxation of profits: both dividends and franking credits are included in taxpayer"s assessable income. They are also entitled to tax offsets for franking credits. Tax treatment: a company is required to calculate its taxable income or tax loss for each income year, a company"s income year is the previous financial year, companies generally pay tax at flat rates: 30% for other companies: a base rate entity is a company that carries on business and has aggregated turnover" for an income year below the prescribed threshold for the year (m for 2017/18) [p539: special rates apply to certain companies (eg non-profit companies, rsa providers, pdfs and life insurance companies) (not focus) Proposed corporate tax rate reforms [p540: the turnbull government has introduced treasury laws amendment (enterprise tax. Plan no 2) bill 2017 which, if enacted, will:

Related Questions

Subpart F was created to prevent U.S. citizens and corporationsfrom deferring taxable income through the use of foreign entities.Prior to subpart F, many U.S. taxpayers achieved deferral of U.S.tax on certain kinds of movable income, such as dividends,interest, rents and royalties, by earning such income throughforeign corporations (Subpart F Overview, 2014). Subpart F operatesby treating a U.S. shareholder of a CFC as if it actually receivedits proportionate share of certain categories of the corporationâscurrent earnings and profits and the shareholder is required toreport this income currently in the United States whether or notthe CFC makes a distribution (Subpart F Overview, 2014). Transferpricing refers to the pricing of transactions between controlledentities. Under IRC 382, controlled entities should pricetransactions in the same way that uncontrolled entities would undersimilar circumstances (Overview of IRC 482, 2015). This is theâarmâs length standardâ, which means that the price of the productthat a US parent company charges its CFC should be the same as itwould charge to an unrelated party for the same product undersimilar circumstances (Overview of IRC 482, 2015). I do not thinkit is fair that companies do not pay a tax on their foreignprofits. Corporations are able to hold these foreign profitsoverseas for years before bringing them back into the United Statesto avoid taxes. While the tax rates on US corporations are veryhigh, as we have discussed in other weeks, there are still manyloopholes in our tax laws that allow corporations to lower theirtaxes. I believe the corporate tax rates could be a little lowerbut even then the tax rules wouldnât be changed. LB&IInternational Practice Service Concept Unit Subpart F Overview.(2014, September 3). Retrieved February 10, 2016, fromhttps://www.irs.gov/pub/int_practice_units/DPLCUV_2_01.PDFInternational global corporations are extremely challenging to taxand audit.

Basically, the US company's foreign subsidiaries are foreigncorporations. It's like France taxing US domestic companies, evenif their parent is in France. It just can't really be done.

Have your say!

1.( T or F ) An individual who directly owns real estate andearns net rental income for the tax year January 1 â December 31,2018 will have an effective tax rate of 29.6% on it.

2.( T or F ) Jumbo LLC, is treated as a partnership and is ownedby 50% by two individuals, Rod and Tom. Jumbo LLC acquired BighornCenter, an industrial rental property for $2 million and collectsrent from tenants. When Bighorn Centerâs value increases to $3million, Jumbo refinances the debt and distributes $500,000 to bothRod and Tom. Rod and Tom treat the $500,000 as ordinary incomesubject to a 39.6% tax rate.

3.( T or F ) A gain resulting from the sale of REIT shares whenthat REIT is domestically controlled will not result in any U.S.federal income tax withholding for non-U.S. holders of the REITstock.

4.( T or F ) A general partnership can be taxed as a corporationif so elected under the check the box rules.

5.( T or F ) An individual investor can own 100% of a REIT.

6.( T or F ) Since dividends are not UBTI, a tax exempt investorwill not have UBTI on dividend income when debt is used to purchasethe stock that paid the dividend.

7.(T or F) An individual, who qualifies as a real estateprofessional, can treat a particular rental real estate activity asnon-passive even when that individual does not materiallyparticipate in the real estate activity.

8.(T or F) Withholding tax to non-US investors on interestincome and dividends may be reduced under the terms of atreaty.

9. Assume a building, owned by a REIT, increases invalue and the REIT that owns it sells the building for $120 millionand then makes a capital gain distribution to its shareholders.Which of the following is true regarding a U.S. individualinvestor's tax treatment:

A. The gain on the sale will be taxed at the ordinary income taxrate.

B. The gain on the sale will be taxed at the capital gain taxrate.

C. There is no tax on the net gain at the shareholder level.

D. The tax treatment is the same for the US investor as it isfor the foreign investor.

E. None of the above.

11. Provide the tax that would be applied for each ofthe following:

1. Withholding tax on passive-typeincome (interest, dividends, etc..) for non-US investors withrespect to US source income. _______________.

2. Tax imposed on a foreigncorporation based on a deemed distribution of US branchoperations____________________.

3. Withholding tax on US businessincome income that is effectively connected with a United Statestrade or business. ______________.

13. Which of the following would cause the largestproblem for an individual who wants to be taxed as a real estateprofessional (which one would be the most difficult to overcome ifan individual wanted to be treated as a real estateprofessional)?

A. The individual owns only rental real estate properties andspends all of his/her time managing them.
B. The individual works for herself as a commissioned real estatebroker and invests in one rental property on the side.

C. The individual works full time for a company that is activein a real estate trade or business (periodically requiringovertime) but has no ownership in the company.

D. The individual owns and operates a hotel where she spends2,000 hours per year and she also invests in a small portfolio ofrental real estate properties.

E. None of the above would cause problems for an individual tobe classified as a real estate professional.

14. What are the highest tax rates for each of thefollowing scenarios?

____. Operating income from a hotel earned by a foreigncorporation (excluding branch profits tax)

____. Interest income earned by a foreign corporationfrom a US borrower

____. Net rental income earned by an U.S. individual(exclude the passthrough deduction)

____. Capital gain earned by an U.S.individual

____. Interest income earned by a U.S.corporation

____. Capital gain earned by an U.S.corporation

____. Depreciation recapture on the sale of U.S. realestate (Section 1250 property) for an individual

____. Depreciation recapture on the sale of U.S. realestate (Section 1245 property) for an individual

15. Identify the following as "ECI" (effectivelyconnected income) or "Not ECI" (not effectively connected income)if earned by a foreign person:

________Rental income from an actively managed storage center inFlorida

________ Interest income from loans to non-U.S. corporateborrowers.

________ A gain on the sale of a shopping center located inBermuda.

Adam, Linda, and Mike are considering starting a bakery togetherin Burlington, VT called Vermont Bakes. They have come to youlooking for advice on the advantages and disadvantages of eachbusiness entity. Adam and Linda will each own 40% of the businessand Mike will own 20%. Adam would like to contribute cash of$40,000, Linda will contribute land with an FMV of $60,000 and anadjusted basis of $25,000. Mike will contribute services of$20,000. In addition, Linda receives $20,000 of cash. Adam, Linda& Mike have indicated that they would like to takedistributions of profits from Vermont Bakes each year in additionto compensation. They plan to pay themselves compensation of$45,000 each and they project that Vermont Bakes will have $10,000in profits each year that they would like to distribute based ontheir ownership percentages. The distributions are as follows:Adjusted Basis FMV Adam - Equipment $2,000 $4,000 Linda - Cash$4,000 $4,000 Mike - Cash $2,000 $2,000 In a concise, well-writtenessay (do not use bullet points - write out your answers inparagraph form): â¢ Explain the advantages and disadvantages of eachentity type (C Corporation, S Corporation, Partnership/LLC),including both tax and non-tax considerations we discussed inclass. Include in your discussion an explanation of entities aretaxed at the entity level and which offer flow through taxation.Explain how are income and losses aggregated when they flow throughto the shareholder/member/partner including the effect this has onthe owner's basis in the entity (if any). â¢ Explain the taxtreatment of property contributions from theshareholder/member/partner to each type entity upon formation.including a discussion of the basis the entity would take in thecontributed property and the basis the shareholder/member/ownerwould have in the entity as a result of the contribution. oCalculate Adam, Linda & Mike's basis in their ownershipinterest if they were part of a prearranged plan to incorporateVermont Bakes as a C corporation. Calculate the basis the Ccorporation would take in the property contributed by Adam, Linda& Mike. Calculate the realized and recognized gain to Adam,Linda & Mike on their contribution to the C corporation (ifany). o Calculate Adam, Linda & Mike's basis in their ownershipinterest if they decided to form Vermont Bakes as a partnership.Calculate the basis the partnership would take in the propertycontributed by Adam, Linda & Mike. Calculate the realized andrecognized gain to Adam, Linda & Mike on their contribution tothe partnership (if any). â¢ Explain the tax treatment of cash andproperty distributions/dividends to a shareholder/member/partner ofeach type of entity. Include in your discussion an explanation ofthe concepts of E&P and AAA and the purpose of thosecalculations. o Calculate Adam's basis in the distributed propertyassuming Vermont Bakes is a C Corporation and indicate whether theproperty distribution would result in gain or loss recognition.Assume Adam's basis just prior to the distribution was $1,000.Would your answer change if this was a liquidating distribution? oCalculate Adam's basis in the distributed property assuming VermontBakes is a partnership and indicate whether the propertydistribution would result in gain or loss recognition. AssumeAdam's basis just prior to the distribution was $1,000. Would youranswer change if this was a liquidating distribution? â¢ ProvideVermont Bakes with a recommendation on which entity you think wouldbest suit their needs including the justification for yourrecommendation.

ACCT2331 Chapter Notes - Chapter 20: Dividend Imputation, Turnbull Government, Double Taxation

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