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Extra tax for shareholders receiving 27.5% franked dividends out of 30% taxed profits

Publication date: 26 Jul 17 | Source: AUSTRALIAN TAX WEEK

Issue: Issue 29, July 2017

Pages: pp. 1-2


If companies on the 27.5% tax rate pay dividends out of 30% taxed profits, the combined tax paid by the company and shareholders will be greater than if the company remained at the 30% tax rate.

The recent company tax cut for SME business companies can result in franking credits trapped in the company, which can be an overall tax increase for the company and shareholders. The extra overall tax can happen when the company becomes entitled to the lower tax rate because of the increase in the turnover threshold for the 27.5% tax rate so that they can only frank dividends at 27.5% even if the profits were taxed at the 30% rate. Unless the company can find some non-taxed income (eg non-portfolio foreign dividends or foreign active branch income) the trapped franking credits is a real tax cost for the shareholders as it will increase the top-up tax they have to pay. The combined overall tax paid by the company and the shareholder will be higher than the situation if the company remained at the 30% tax rate.

This problem first affected companies with less than $10m turnover that became entitled to the 27.5% tax rate on 1 July 2016. But going forward it will continue to be a problem as the 27.5% threshold increases to $25m on 1 July 2017 and $50m on 1 July 2018.

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Author profiles

Stephen Nisbet
Stephen is a Senior Manager in the Corporate Tax Division of KPMG, Adelaide. With over ten years' experience providing advice to a range of clients from emerging SMEs to listed companies, Stephen has a strong client focus and a keen interest in a variety of business sectors, ranging from financial services to forestry. - Current at 05 August 2015
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Mark Molesworth CTA
Mark is a tax partner at BDO and a member of The Tax Institute’s Large Business & International Technical Subcommittee and the Queensland State Technical Committee. He is also a member of the expert advisory panel to the Board of Taxation and The Tax Institute’s representative on the ATO’s Private Groups Stewardship Group. Mark has many years of experience in advising taxpayers with respect to all areas of taxation, including CGT, FBT and income tax. He also provides taxation advice to other smaller accounting and legal practices in respect of their clients. - Current at 18 May 2018
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