Can a new company pay a fully franked dividend in its first year?

A question I get asked regularly is can a new company pay a fully franked dividend in its first year, even if it has never paid a tax bill yet as it has not yet lodged its first tax return and so has not paid any PAYGI?

The answer is a big YES without any penalty. But let me explain why.

  1. The payment of the franked dividend will create a franking deficit tax liability may arise.
  2. But the Franking Deficit Tax can be offset against the company’s income tax bill that will be paid when they pay the first tax bill when the first return is lodged.
  3. However, this is where people get worried as they know that where the deficit at the end of the year is more than 10% of all the franking credits that arose during the year, which in this year was $0, the company’s franking deficit tax offset is reduced by 30%. But the 30% offset reduction does not apply in the first income year in which a private company has an income tax liability if all the conditions of subsection 205-70(5) are met. The main concern in this subsection is that the amount of the income tax liability for the relevant year is at least 90% of the amount of the deficit in the company’s franking account at the end of the relevant year. So be careful.
Advertisements

About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
This entry was posted in Income Tax, Planning Idea. Bookmark the permalink.

2 Responses to Can a new company pay a fully franked dividend in its first year?

  1. Boon says:

    Hi Ken,

    A clarification if you don’t mind. Would a franking account tax return still have to be lodged in your explanation of a company paying franked dividends in its first year of operations?

    Thank you and regards,

    Boon

    • Ken Mansell says:

      Boon, the instructions to the franking account return (www.ato.gov.au/uploadedFiles/Content/MEI/downloads/TP39971NAT13822014.pdf) say you need to complete the return. On page five it states…

      Exception for private companies with no previous income tax liability
      The FDT offset reduction will not apply if:
      (a) the entity is a private company for the relevant year
      (b) the company has not had an income tax liability for any
      income year before the relevant year
      (c) the company would have had an income tax liability for the
      relevant year if it did not have the tax offset (but had all its
      other tax offsets) and
      (d) the amount of the liability referred to in paragraph (c) is at
      least 90% of the amount of the deficit in the company’s franking account at the end of the relevant year.
      Print P in the code box if the entity had item 1, 3, 5 or 6 debits and is a private company that satisfies all the criteria in (a) to (d) above.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s