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Monday Ramblings… What is the Imputation Rate?

To work out the Company Tax Rate we need to know the aggregated turnover for the entire year and the base rate passive income for the entire year – See a rambling of mine a month a go called “Sunday Ramblings – Company Tax Rates are Messy”…

However, Companies can pay franked dividends to their shareholders at any time during a year. Therefore, when a company wants to pay a dividend it will not know its aggregated turnover for the entire year as the year has not ended yet. They also won’t know the amount of its base rate entity passive income for the entire year, or the amount of its assessable income for an income year until after the end of that income year.

Does this mean a company will not know its franking rate until after the end of the year. 

To solve this problem, to work out what rate a company can frank its dividend in a year, the company must assume that:

  • Its aggregated turnover for the income year is equal to its aggregated turnover for the previous income year;
  • Its base rate entity passive income for the income year is equal to its base rate entity passive income for the previous income year; and
  • Its assessable income for the income year is equal to its assessable income for the previous income year.

However, if the company did not exist in the previous income year, its corporate tax rate for imputation purposes for an income year will be the lower corporate tax rate of 27.5%.

Effectively, this means the amount a company can frank a dividend will depend on the factors used to assess last year’s company tax rate. 

Example – company does not have a previous income year

Kookaburra Co was founded on 1 July 2017. As Kookaburra Co did not exist in the prior income year (the 2016-17 income year), its 2017-18 corporate tax rate for imputation purposes is 27.5%.

Example – company does not have any assessable income in the previous income year

Swan Co has been carrying on a business since 1 July 2014. In the 2016-17 income year, Swan Co was dormant and had no aggregated turnover. Swan Co’s 2016-17 assessable income was nil, and so its BREPI was nil.

As Swan Co existed in the 2016-17 income year, the corporate tax rate for imputation purposes of Swan Co for the 2017-18 income year is determined as the corporate tax rate for the 2017-18 income year based on the assumption that its aggregated turnover, BREPI and assessable income are the same as the 2016-17 income year.

As Swan Co’s assessable income and BREPI for the 2016-17 income year are nil, it has no more than 80% of its assessable income as BREPI. As Swan Co has no connected entities or affiliated entities in the 2016-17 income year, Swan Co’s aggregated turnover for the 2016-17 income year is nil, its aggregated turnover is less than the relevant threshold for the 2017-18 income year. Therefore, its corporate tax rate for imputation purposes for the 2017-18 income year is 27.5%.

THE PLANNING IDEA

Is it possible to have all the income of a company taxed at the lower base rate entity rate but all dividends at 30%?

Example (in the 2021/22 year)

Ken and Vicky Investments is carrying on a business that earns $100,000 a year on a turnover of $200,000. The only passive income is $1 of interest each year.

The tax payable each year will be at 25% as it is a base rate entity. The company retains all the profits.

But in a year in the future the owners close the business down and in that year the only income is $1 interest. As this is the only income the company is no longer a base rate entity and so the interest is taxed at 30% (or 30 cents).

If the retained profits are paid out as dividends in the subsequent year, even though they were all taxed at 25%, the imputation rate will be 30%.

By 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.

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