Module 1: Taxation of Trusts, and Income of Minors

MODULE 1: TAXATION OF TRUSTS AND TRUST INCOME


(Division 6 Pt III - sec 95 to 102 ITAA1936)
The Nature of a trust:
 A trust is a relationship between a person (“the trustee”) and another person (called “the beneficiary”) in which the trustee
holds property (the “trust property”) for the benefit of the beneficiary.
 Sometimes there is more than one trustee often there are many beneficiaries.
 The trustee may be the original owner of the trust property who declares that it holds the property on trust for the beneficiaries.
Where the trustee makes such a declaration, it divests itself of the equitable ownership in the property and passes it on to
the beneficiaries.
 If the trustee is not the original owner of the trust property, the person who provides that property is known as the settlor.

TRUSTS & THE BENEFICIARIES OF TRUST ESTATES

The Nature of a trust:
 The creation of a trust brings into existence a fiduciary obligation that is imposed on the trustee by :
o the person establishing the trust (who may be the same person as the trustee),
o another person,
o court order or declaration, or
o operation of law.
 Although the trustee may hold the legal title to property, the trustee is compelled in equity to deal with it in accordance with the
express or implied terms of the trust deed.

Types of Trusts
 Usually trusts come into being because they are intended and documented and these can include:
o Bare Trusts
o Fixed Trusts (e.g., a unit trust)
o Discretionary Trusts
o Constructive trusts
 For tax purposes the executor of a deceased estate is treated as a trustee.

THE INCIDENCE OF TAX – WHO PAYS THE TAX ON TRUST INCOME?

An Overview
 A trust is not a separate taxable entity. It is treated as a notional taxpayer (like a partnership).
 Key concepts in determining who pays tax on trust income are:
 present entitlement, and
 legal disability.
 Generally, it is the beneficiaries who are taxable on it. But in certain circumstances (where no beneficiary is “presently
entitled”), the trustee may be liable to be assessed and to pay tax.

Present Entitlement:
 a central concept in determining how trust income is assessed.
 To be presently entitled the beneficiary must have the right to demand immediate payment of their share of the net income
of the trust.
 The interest must not be contingent but must be such that the beneficiary may demand immediate payment of that income:
FCT v Whiting (1943)
 If the beneficiary is under a legal disability the interest must be such that the beneficiary would have been able to demand
immediate payment of the income had there been no disability or incapacity: Taylor v FCT (1970)

Deemed Present Entitlement

 Sec 95A(2) – vested and indefeasible interest but cannot demand payment.
 Sec 101 -- where the trustee of a discretionary trust exercises their discretion in favour of a beneficiary – (until this point, the
beneficiary cannot be presently entitled).
o contrast beneficiaries of a fixed trust who may be presently entitled even if the trustee does not pay an amount
Woellner, para 17-100

Taxation of trust income

When is the beneficiary liable?
 The beneficiary is assessed if he/she is presently entitled to income of the trust, is not under a legal disability and is a resident:
sec 97.
 The beneficiaries may be taxed on their respective shares of the net trust income even though the trustee has not
distributed that income to them by the end of the year in which it is derived.
 The beneficiary is taxed on the trust income at their ordinary tax rates.
Woellner, para 17-070

When is the trustee liable?

The trustee is assessed and pays tax on behalf of a beneficiary in the following circumstances:
1) on that part of the net income to which a beneficiary is presently entitled but where the beneficiary is under a legal disability:
sec 98
 the trustee pays tax on behalf of the beneficiary at the beneficiary’s ordinary rates or Div 6AA penalty rates (see
“Minors” later)
 the beneficiary is paid the amount left after tax is remitted to the ATO
 2) on the balance of the net income to which no beneficiary is presently entitled, e.g. the income that is accumulated in the
trust – this is taxed under either:
 s 99A at the penalty rate of 47%, or
 s 99 at ordinary rates, where the Commissioner exercises his discretion that this section apply, e.g., for a trust created
under a will.
3) on behalf of a beneficiary who is presently entitled to income of the trust but is not a resident:
 the trustee pays tax on behalf of the beneficiary on the Australian-source trust income at non-resident rates: sec
98(2A).

NET INCOME OF A TRUST ESTATE

 As a trust is not a taxable entity…
the calculation of the ''net income'' of a trust is simply the first step in determining the amounts on which the trustee and/or
the beneficiaries are assessable.
 The net income of a trust is the assessable income of the trust (calculated as if it was a resident taxpayer) less allowable deductions
(sec 95(1)).
 The calculation requires both Australian and foreign-source income and related deductions to be taken into account.

TRUSTS LOSSES
 Trust losses do not flow to beneficiaries – unlike partnership losses that flow to partners and can be used to reduce their tax liability
 Trust losses may be carried forward to future years if the trust satisfies certain tests. If these are not satisfied, the trust losses are lost.
 If a trust loss is carried forward, it must first be offset against exempt income of the trust in that year
Woellner, para 17-130 and 17-140.

DISTRIBUTIONS OF TRUST INCOME

Trust income that has been previously assessed to the trustee is not assessable for a second time when received by the beneficiary: s
98B.

On the other hand, receipts of previously untaxed trust income may be assessable to the beneficiary – e.g., where an amount is paid to
a resident beneficiary and the amount represents trust income that is taxable in Australia but which has not previously been
subject to tax in the hands of the beneficiary or trustee: sec 99B.

Trust income retains its character in the hands of the beneficiaries – consequently, capital gains, exempt income and franking credits
flow through the trust to the beneficiary.

If the trust income includes offsets or credits (e.g. for tax withheld overseas on interest received by the trust in Australia), these offsets
or credits flow to the beneficiaries according to their share of the net income of the trust.

Module 3: Income of Minors

(Div. 6AA of Part III ITAA 36 - sec 102AA–102AJ)
This is a crucial anti-avoidance measure that came into operation in 1978 – it was perhaps the most important measure in limiting the
large scale use of trusts simply to reduce tax burdens. Penalty rates are imposed on the unearned income of minors:

Income Amount $ Tax rate

0 – 416 Nil

417 – 1,307 68%

1,308+ 47%

These rates apply to:

(1) “prescribed persons”, generally persons aged under 18 on 30 June who are not working full-time,
(2) who receive “eligible assessable income”, generally unearned income such as dividends, rent or trust income.

Div 6AA rates do not apply to “excepted assessable income”, which includes employment income and trust income from a deceased estate.
Read: Woellner, 21-010 to 21-050

Revision Questions – ATSM 27th Edition

 TRUSTS:
o Trustee-beneficiary income: 199
o Trust income received by a minor: 202
o Present Entitlement: 207
o Trust Income – Tax payable: 205, 208
 Module II: Taxation of Companies and Shareholders

Corporate Taxation
1. INTRODUCTION: Choice of Structure – considerations
2. Residence of Companies
3. Taxable income; tax payable; reconciliation for accounting income
4. Changes in Corporate Control and its Impact on the Treatment of:
i. Carry Forward of Corporate Losses; and
ii. Corporate Bad Debts
5. Corporate Distributions
6. Imputation and the Franking Account

1. Overview
 Complex rules for corporate tax entities –
o companies are the most common example
o includes “unincorporated associations”, eg clubs
 Since 1 July 2002 wholly-owned groups can elect for tax consolidation so they have a single tax return and franking account.
Reduces tax effect of intra-group transactions but separate complex tax rules apply.

2. Residence of Companies
Tests for residency: --Consult materials for Lecture 2

3. TAXABLE INCOME; TAX PAYABLE


Reconciliation of Accounting and Taxable Income
 A company’s accounting net profit/loss normally will not be equal to its taxable income due to a variety of factors such as:
o Expenses not allowed as deductions
o Franking credits
o Net capital gains
o Past year tax losses
o Special tax incentive deductions
o Grossing up of foreign income

It is carried out as follows:

NET PROFIT/LOSS as per the Income Statement

plus ASESSABLE INCOME NOT INCLUDED IN INCOME STATEMENT
e.g. net capital gains

plus DEPRECIATION EXPENSE at accounting rates

plus ITEMS NOT ALLOWED AS DEDUCTIONS
e.g. doubtful debts expense
Non-allowable donations
Capital expenditure
Income tax expense
Increases in provisions
R&D expenditure subject to tax offset

equals ADJUSTED NET PROFIT

less NET EXEMPT INCOME
less DECLINE IN VALUE FOR TAX PURPOSES
less SPECIAL DEDUCTIONS
e.g. past year tax losses
Transfer losses
Leave entitlements paid/bad debts written off
Decreases in provisions

equals TAXABLE INCOME

EQUALS:
Taxable income: to which relevant tax rates are applied – (30% for companies)

LESS :
Tax offsets : (e.g. for franked dividends received, and for foreign taxes paid)

4. Changes in Corporate Control

 Background: Provided opportunities for tax evasion through trading in “loss companies”
 Restrictions are imposed on the deductibility of prior year tax losses under Subdiv. 165-A ITAA97
 Company losses can be carried forward only if one of the following tests are satisfied:
o the Continuity of Ownership Test: sec 165-12; or
o the Same Business Test: sec 165-13
 Read Woellner 19.000 – 19.030
 Note: These restrictions ALSO apply to the deductibility of Corporate Bad Debts
 The Continuity of Ownership Test
 This requires that the same persons must have more than 50% beneficial control at all times during the ownership test period in
relation to the following interests:
o Voting control;
o Rights to the company’s dividends; and
o Rights to the company’s capital distributions
 Ownership test period runs from start of the loss year until the end of the income year that the loss is being claimed as a
deduction – s165-12(1)

 Example:
o 2015: Company has $10,000 loss
o 2016: Company has $3,000 loss
o 2017: Company has assessable income of $6,000
Can the company offset its prior year losses against its assessable income in 2017?

Shareholders 2015 2016 2017

A 26% 26% 26%

B 40% 30% 30%

C 34% 0% 0%

D 0% 44% 44%

A and B have retained control of more than 50% beneficial interest of the company between 2015 and 2017.
Therefore, the ownership test has been satisfied.
The Company can deduct $6,000 of its $13,000 accumulated tax losses from its assessable income in 2017, meaning it pays no tax in
that year.
Where a beneficial owner of shares dies, they are deemed to continue to own those shares until their estate or beneficiaries sell or
otherwise dispose of those shares – s165-205.

The Same Business Test

 If a company fails the continuity of ownership test, it can still carry forward a tax loss if it satisfies the “same business test”
Relevant Considerations:
 Did the company carry on the same business in the tax year in question as it did before the change in ownership or control
occurred?
 This test is not satisfied if the company has also derived assessable income from new kinds of businesses or transactions –
s165-210
 Same business: Is a question of fact
 Cases:
o Avondale Motors (Parts) v FCT (1971) – Woellner 19-030, Krever 319
o AGC Advances - Krever 149
 New kinds of business/transactions: TR1999/9

5. Rules for the Assessability of Corporate Distributions

Dividends
 Under general law, a dividend is a payment of profits made by a company to its shareholders while the company is a going concern.
 Sec 6(1) ITAA36 definition: A dividend includes:
o any distribution made by a company to any of its shareholders, whether money or other property; and
o any amount credited by a company to any of its shareholders as shareholders.
o Forgiving a debt owed by a shareholder is not a dividend
 Black (1990) – Krever p.316
 The dividend must be paid to “shareholders” of the company -- to a person who is registered, or entitled to be registered, as a
member on the company’s share register -- Patcorp Investments Ltd – Krever p 311
Woellner 18-210

Dividend paid out of profits -- to be assessable under s 44(1), a dividend must be paid out of profits derived by the company -- whether
a company has profits depends on commercially accepted accounting principles
 Slater Holdings Ltd (1984) – profits can include the proceeds of gifts made to the company. Krever 309
 A payment to a shareholder by a company out of a share capital account is deemed to have been paid out of profits (s 44(1B)
 But payments out of the share capital account are not dividends unless there is an arrangement whereby payments are made into
the share capital account by one person and that amount is paid by the company out of the account to another person – sec 6(4)
ITAA36.

Sec 44(1) ITAA36: The assessable income of a shareholder includes:

o Resident Shareholders should include dividends paid to them by the company out of profits derived by it from worldwide
sources.
o Note: resident shareholders also include in their assessable income -- the franking credit attached to any franked dividends that
they receive.
o Non-resident Shareholders should include dividends paid to them by the company to the extent that they are paid out of
Australian-sourced profits.
Exceptions:
o sec 44(1) is subject to sec 128D which exempts dividends from assessable income if they are subject to dividend withholding tax
when they are payable to a non-resident shareholder, and
o fully franked dividends received by a non-resident are not included in assessable income or liable to dividend withholding tax (sec
128B(3)(ga)).
Woellner 24-620

SCENARIO 1: Resident Shareholder Receives a Dividend from Overseas

o Dividends received by a resident shareholder are grossed up to include foreign tax paid
o The grossed-up amount is then included in assessable income
o If foreign tax has been paid on the dividends, a foreign income tax offset may be available to the taxpayer (Div 770 ITAA97).
o Woellner 24-380

Example: An Australian resident taxpayer who is on the top marginal tax rate receives a dividend cheque of $5,000 from an overseas
company. 15% tax - (i.e. $750) - was paid on the dividends in the foreign country.

Dividend received by the taxpayer s. 44(1) $ 4,250

+ Gross-up for foreign withholding tax $ 750
= Taxable Income of Shareholder $5,000

Tax (49% incl. Medicare) $2,450

Foreign tax offset s. 770-70 $ 750
= Net Tax payable by Shareholder $1,700

SCENARIO 2: Resident Shareholder Receives a Franked Dividend from an Australian Company

Under imputation, shareholders receive a “franking credit” for tax paid by the company – tax is “imputed” to the shareholder

Assumption: the shareholder’s marginal tax rate is 49%, (including Medicare Levy)

Company Level
Taxable income $5,000
Tax at 30% $1,500
After Tax Profits $3,500

Shareholder Level
Dividend $ 3,500
Franking Credit $ 1,500
Taxable Income $ 5,000
Tax at 49% $ 2,450
Offset for franking credit $ 1,500
Net Tax Payable $ 950
Total Tax Paid: $1,500 + $950 = $2,450

SCENARIO 3: Resident Shareholder Receives a Franked Dividend from an Australian Company

Under imputation, shareholders receive a “franking credit” for tax paid by the company – tax is “imputed” to the shareholder

Assumption: the shareholder’s marginal tax rate is 19%, plus Medicare Levy

Company Level
Taxable income $5,000
Tax at 30% $1,500
After Tax Profits $3,500

Shareholder Level
Dividend $ 3,500
Franking Credit $ 1,500
Taxable Income $ 5,000
Tax at 21% - (incl Medicare Levy) $ 1,050
Offset for franking credit $ 1,500
Refund of excess offset: sec 67-25 $ 450
Total Tax Paid: $1,500 - $1,050 = $450

Deemed Dividends
Background: Woellner 18-500
Situations in which a dividend has not been paid under the general tax rules (s 44(1)), but is “deemed” to have been paid:

 Loans by private companies to shareholders/associates

o Part III, Division 7A: sec. 109D ITAA36
o Exemptions
o Read: Woellner 18-510
o Overview of Div 7A: https://www.ato.gov.au/Business/Private-company-benefits---Division-7A-dividends/
  Excessive payments by private companies to shareholders/associates
o sec 109 ITAA 36
o Read: Woellner 18-520
 Liquidation distributions out of profits
o sec 47(1) ITAA 36;
o Read: Woellner 18-560

Capital Losses Of Shareholders

 CGT Event G3 allows a capital loss where a liquidator declares shares of a company worthless on the basis that there is no
likelihood of a further distribution (s 104-25 ITAA97).

6. Imputation & the Franking Account
 Div 202 ITAA97

Under imputation, shareholders receive the benefit of tax paid by the company when they receive franking credits attached to their dividends
 To pass on franking credits to its shareholders, a corporate tax entity must frank a distribution (sec 202-5)
 Formalities:
o Franking entity (the company) must be a resident company
 non-resident companies cannot frank dividends**
o The dividend must be a frankable distribution
o Company allocates franking credit to the distribution
** Except NZ resident companies as Aust and NZ can mutually recognise franking credits.
Introduction: Woellner 18-330

Frankable Distributions
All distributions by the company are frankable unless deemed to be unfrankable: s 202-40

Frankable Distributions s960-120 Unfrankable Distributions s202-45

Dividends Distributions that are sourced from a company’s share capital account

Certain amounts that are deemed to be Excess of purchase price for an off-market share buyback over the
dividends, e.g. liquidation distributions market value of those shares – S159GZZZP ITAA 36
out of income derived by the company

Certain private company loans or payments to shareholders or

associates that are deemed dividends under Div 7A

 Formalities:
o Company prepares a distribution statement to all shareholders receiving the distribution
o Franking credits are allocated to the frankable distribution and these amounts are set out on the distribution statement
Requirements:
 Dividend Statements must include the following information:
o the identity of the company;
o date of distribution;
o total amount of dividend;
o the amount of franking credit;
o the franking percentage; and
o any dividend withholding tax deducted from the distribution
Woellner para 18-340

 Public companies must provide the distribution statement on or before the day the distribution is made
 Private companies have until four months after the end of the tax year in which the distribution was made (generally by 31
October) to issue the distribution statement – effectively enabling retrospective franking
S202-75
  Maximum Franking Credit for a distribution =
Amount of Frankable Distribution x 30/70

 Example: Frankable distribution of $140

Maximum Franking Credit = $140 x 30/70 = $60

Effectively, the company would have paid $60 tax on a dividend of $200, leaving $140 in fully franked dividends for its shareholders.
($200 x 30% corporate tax rate = $60)
 Section: 202-60

Partly Franked Dividends

 Dividends can be fully franked, partly franked or unfranked.
 Franked part of distribution =
 Franking credit on distribution x (1 – Corporate Tax Rate)/Corporate Tax Rate
 The unfranked portion of a partly franked dividend =
 Total distribution – franked part
 WORKED EXAMPLE: $700 distribution to shareholders with $60 franking credits attached
Franked part of distribution = $60 x (1-0.3)/0.3
= $60 x 0.7/0.3
= $140
Unfranked part of distribution = $700 - $140
= $560
 Sec 976-1, sec 976-5

Benchmark Franking Rule

 Prevents favouritism amongst shareholders (and franking credit tax planning) when dividends issued
 All frankable distributions during a “franking period” must be franked to the same extent = the benchmark franking percentage – sec
203-25
 Whatever franking percentage is used for the first distribution must be used for all distributions during that period – sec 203-25
 Franking period for private company = income tax year
 Non-private companies (basically, listed companies) have two six-month franking periods during each income year.
Woellner para 18-350
  The benchmark percentage for the first frankable distribution made in a franking year is calculated as:
franking credit allocated to the distribution x 100%
maximum franking credit for the distribution

 EXAMPLE: A private company makes its first distribution during an income year on 1 August. The distribution is $700, and a franking
credit of $150 is allocated.
Maximum franking credit = $700 x 30/70 = $300
Benchmark percentage: $150/$300 x 100 = 50%
A later distribution of $1400 in that income year would therefore have to be franked at 50%, ie $1400 x 30/70 x 50% = $300
franking credits

 Exceptions to the benchmark rule: sec 203-20

 Listed public companies that only have a single class of membership
 Listed public companies that are required by their constitutions to frank all distributions to their members under a single
resolution at the same franking percentage, and which make the distributions to all of their members
 Rationale: such entities have no streaming opportunities

 Penalties apply for breaching the benchmark rule

 Overfranking requires the company to pay “over-franking tax” – s203-50
o although generally a company gets a franking credit for its franking account when it pays tax, there is no credit for
overfranking tax
 Underfranking results in a franking debit in the company’s franking account – this cancels franking credits that could have been
passed to shareholders

Franking Account
 Purpose: to indicate to the company how much franking credits can be passed to shareholders -- Div 205 ITAA97
 Franking deficit tax is payable if, at end of the year, the company has a deficit in its franking account
 Deficit shows that the company has distributed more franking credits than is warranted by the tax it has paid
 Amount of franking deficit tax = amount of deficit in franking account
Woellner 18-370

Calculating a Franking Account

Events that Give Rise to a Franking Credit Entry
 Resident company pays a PAYG instalment
 Resident company pays income tax
 Resident company receives a franked distribution
 Franked distribution is received indirectly by the resident company through a partnership or trust
 Entity incurs a liability to pay franking deficits tax -- seen as pre-payment of tax
Woellner para 18-380

Events that Give Rise to a Franking Debit Entry

 Resident company pays a distribution
 Resident company receives a refund of income tax
 Resident company overfranks a distribution in contravention of the benchmark rule
 Company with a franking account surplus ceases to be a franking entity
 Company pays a deemed dividend
Woellner para 18-385

Franking Account of XYZ Pty Ltd


FYE 30 June 2017
Date Event DR CR BALANCE

1/7/16 Opening Balance Carried Fwd $30,000 $30,000

21/7/16 Final PAYG Instalment for 2015/16 $40,000 $40,000 $70,000

28/10/16 Payment of PAYG Instalment $50,000 $50,000 $120,000

1/11/16 Receipt of $100,000 distribution including $20,000 $20,000 $140,000

franking credits allocated

28/2/17 Payment of PAYG Instalment $30,000 $30,000 $170,000

1/3/17 Payment of $70,000 fully franked dividend $30,000 $140,000

11/3/17 Receipt of refund of 2011 tax of $10,000 $10,000 $130,000

28/4/17 Payment of PAYG Instalment $20,000 $20,000 $150,000

2/5/17 Receipt of trust distribution of $70,000; $30,000 franking $30,000 $180,000

credits allocated
 30/06/17 Closing balance $180,000
Effect of Franking Credits on Shareholders
 Shareholders may receive franking credits directly or indirectly
 Subdiv 207-A ITAA97 regulates direct distributions of franked distributions
 Entity includes amount equal to the franking credit plus the distribution itself in their assessable income
 Entity claims a tax offset equal to the franking credit
Woellner para 18-389 and 18-390

 Company X has 3 resident shareholders (Company Y, Jane & Mary) who each receive a fully franked dividend of $7,000.
 Company Y had other income of $2,000, Jane had other income of $60,000, Mary $20,000.
 Tax position of each shareholder:
*Below thresholds
Company Y Jane Mary

Other Income $ 2,000 $60,000 $ 20,000

Franked Distribution $ 7,000 $ 7,000 $ 7,000

Franking Credit $ 3,000 $ 3,000 $ 3,000

Taxable Income $12,000 $70,000 $30,000

Tax (incl. Medicare) $ 3,600 $15,697 $ 2,842

Less Tax offset for Franking credits ($3,000) ($3,000) ($3,000)

Net tax/(refund) $ 600 $12,697 ($158)

Franking Credit Rules

 Excess franking credits may be refunded if shareholder is an individual –sec 67-25
 A company is not entitled to a refund of excess franking credits but may convert the excess credits to a loss to be carried forward
for deduction in the next year – sec 36-55
 Only resident shareholders are entitled to offsets for franking credits --- sec 207-70
 Generally, a shareholder must have held the shares for at least 45 days to claim franking credits and offset --- Woellner 18-420

Revision Questions 

Students are advised to read the following sample questions from ATSM (27th edn):
 Assessability of Corporate Distributions:
o Dividends – Resident Shareholders: 216, 222, 223 and 238
o Dividends – Non-resident Shareholders: 221
o Franking Account: 231, 232, and 235 - 237
 Carry Forward of Losses:
225 and 228
 Taxable income; tax payable (reconciliation of accounting and taxable income)
239 and 241

Tax Return
Company Tax Return 2014 :
https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/TP40264NAT06692014.pdf
EXAMPLE
Pacific Solutions Pty Ltd, a resident manufacturing company provides you with the following information for the year ended 30 June 2016:

Income Statement $ $
Gross profit from trading 166,030
Fully franked dividend received 10,800
Profit on sale of furniture 500
Net dividends received from Maple Ltd. (a Canadian company) 1,750
179,080

Administration Expenses 7,000

R&D expenditure – wages 40,000
Depreciation on fixed assets 15,000
Interest expense 800
Annual leave expense 4,000
Doubtful debts expense 1,500 68,300
Net profit 110,780

Additional Information
1) The dividends from Maple Ltd. had $250 Canadian tax withheld.
2) The company’s annual aggregate turnover is less than $20 million.
3) An amount of $2,300 was written off as bad debts during the period.
4) Annual leave expense $4,000 resulted from an increase in the provision account.
5) Annual leave actually paid during the period amounted to $2,500.
6) Decline in value of depreciating assets for tax purposes for the year was $16,000.
7) Profit on sale of furniture for tax purposes was $900.
8) Administration expenses included capital expenditure of $1,250.
9) PAYG tax installments paid were $25,000.
10) The company wishes to claim the R&D tax offset.

a) Calculate the taxable income of Pacific Solutions Pty Ltd for the year ended 30 June 2016.

TAXABLE INCOME $ $
Net Profit 110,780
ADD BACK
Franking credit (10,800 x 30/70) 4,629
Tax profit on furniture 900
Foreign Tax paid 250
Depreciation expense @ accounting rates 15,000
Increase in Provision – Annual Leave 4,000
Doubtful debts expense 1,500
Disallowed capital expenditure 1,250
R&D expenditure subject to tax offset 40,000 67,529
178,309
LESS
Decline in value @ tax rates 16,000
Accounting profit on furniture 500
Bad debts written off 2,300
Annual leave paid 2,500 21,300
TAXABLE INCOME 157,009

b) Calculate Pacific Solutions Pty Ltd’s tax payable for the year ended 30 June 2016.

Tax on $157,009 x 30% 47,102.70

Less: R&D Tax Offset ($40,000x 45%) 18,000
Franking tax offset 4,629
Foreign income tax offset ** 250 22,879.00
24,223.70
Less: PAYG tax instalments 25,000.00
Refund Due 776.30

** No calculation is required because the foreign tax paid is less than $1,000.
Choice of Structure – considerations
Companies
 A company is a separate legal entity which is capable of owning assets in its own name. Companies are bound by their
constitution and the Corporations Act. A company’s directors control the decision making process and shareholders own the
equity in the business and can enforce procedures including company voluntary liquidation.

Advantages
 Personal assets are separate from business assets, thus ensuring asset protection for all shareholders. As a shareholder your
liability is limited to your share capital, if a company is limited by shares (and not guarantee);
 Tax is levied on all taxable profits at a flat rate of 30%;
 Able to retain profits in the company (ie. Profits do not have to be distributed to shareholders as dividends);
 Ease of introducing and retiring equity members;
 Companies are able to pass on refundable franking credits to shareholders via dividends;
 Access to R & D concessions;
 Ability to raise levels of capital;
 Suitable entity for public (ASX) listing; and
 Preferred structures (generally ) for lenders.

Disadvantages
 Revenue & Capital losses must be retained until recouped and are subject to tests;
 Top up Tax potentially payable by shareholders when dividends are paid (ie. Difference between marginal rate and corporate
rate);
 Income loses its character on distribution, which can cause adverse outcomes;
 The 50% general CGT exemption is not available to companies;
 More common application of Division 7A (shareholder loan rules);
 Income can be subject to the Alienation of Personal Services Income measures;
 Owner’s benefits could be subject to FBT where the owner has an employment relationship with the company;
 Increased regulation by the ASIC and the Corporations Act; and