Reduction Of Company Tax Rates And Imputation Credits
Currently two company tax rates can apply to companies (that are carrying on a business):
- For the year ended 30 June 2017, companies with turnover of less than $10 million will be subject to company tax at a rate of 27.5% (i.e. company tax will only be 30% if turnover is $10 million or more); and
- For the year ending 30 June 2018, companies with turnover of less than $25 million will be subject to company tax at a rate of 27.5% (i.e. company tax will only be 30% if turnover is $25 million or more).
From 1 July 2016 onwards, the rate at which dividends will be franked will depend on the company’s turnover of the previous year. For example, for the year ending 30 June 2018:
- If the turnover of the previous year (i.e. 2017) is less than the current year’s turnover benchmark ($25 million for 2018), the 2018 dividend will be franked at 27.5%; and
- If the turnover of the previous year (i.e. 2017) is equal to or more than the current year’s turnover benchmark ($25 million for 2018), the 2018 dividend will be franked at 30%.
Because company profits may be taxed at different rates from the rate at which these dividends are franked, the disparate tax treatment can lead to either:
- Over-franking of dividends (i.e. if company profits are taxed at 27.5% but franking is done at a rate of 30%) – in which case certain actions need to be undertaken to avoid the imposition of franking deficit tax; or
- Under-franking of dividends (i.e. if company profits are taxed at 30% but franking is done at only 27.5%) – in which case franking credits may become trapped and may not be usable.
Under proposals before the Parliament, companies will be subject to the lower 27.5% tax rate instead of the 30% tax rate, if they derive 80% or less of total income from passive activities. Activities that we currently understand to be non-business activities may also be regarded as business (not passive) activities that may be eligible for the 27.5% lower tax rate.
Because these changes and proposed changes are extremely complex, we would recommend that you speak to us today if you are operating in a corporate structure and/or planning to pay dividends.
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