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TAXATION OF COMPANIES The taxable income of a company is worked out in much the same way as that of an individual, ie from the assessable income are deducted all ordinary business deductions, depreciation, any special incentive deductions and any relevant non-business deductions. Companies may be eligible for an inter-corporate dividend rebate and are subject to restrictions on the deductibility of losses and bad debts. Certain classes of companies receive special income tax treatment. Special rules apply in determining income derived from non-resident companies, or income derived by resident companies from foreign sources. Proposed company tax changes Redesigned company and trust tax arrangements are proposed to apply from 1 July 2000 under the Tax Reform Plan. Key features of the proposed arrangements are: (i) a simplified imputation system involving full franking of all profits paid to individuals or other entities outside consolidated groups; (ii) the refund of excess imputation credits for resident individuals and complying superannuation funds; and (iii) taxing trusts like companies. The new arrangements would also be extended to other entities offering limited liability such as limited partnerships, co-operatives and life insurers. Fuller details are expected to be available by September 1999.
SUMMARY OF IMPUTATION SYSTEM The basis of the imputation system of company taxation is that individual shareholders who receive assessable dividends from a company are entitled to a rebate for the tax paid by the company on its income. It is called an imputation system because the payment of company tax is imputed to shareholders. The imputation system can be briefly summarised as follows: · the system applies to dividends paid by Australian resident companies to resident individual shareholders.· tax paid at the company level is allocated to shareholders by way of imputation credits attached to the dividends they receive. Such dividends are called franked dividends; · an amount equal to the imputation credits attached to franked dividends is included in the assessable income of resident individual shareholders, who are then entitled to a rebate of tax (ie a franking rebate) equal to the amount included in their income;· the extent to which a company may frank a dividend broadly depends on the credit balance in its franking accounts at the time of payment of the dividend. Credits arise when a company pays company tax. Credits also arise when a company receives a franked dividend from another company. In this way, credit for company tax borne by one company is effectively transferred to the company receiving the franked dividend to allow that company in turn to frank dividends it pays to its shareholders;· special rules determine the minimum extent to which a dividend is required to be franked in order to avoid under-franking. Subject to an exception for small balances, the basic rule is that a company must frank dividends to the extent permitted by its franking account balance at the date of payment of the dividends;· other rules ensure that, when determining the extent to which particular dividends are to be franked: (i) future dividends which the company has an obligation to pay, eg dividends on preference shares, are taken into account; and (ii) all dividends paid as part of the one distribution, eg interim dividends paid to ordinary shareholders, or as part of another distribution made on the same day, are franked to the same extent . Special rules also apply to certain dividend streaming arrangements . Subject to these rules, there is no requirement for a company to equally frank interim and final dividends, or dividends paid on different classes of shares;· to frank a dividend, a company must declare the extent to which it is franked , and must provide shareholders with this and other relevant information relating to the dividend;· a company may, at its option, frank dividends to an extent greater than otherwise would be the case by making a reasonable estimate of any additional franking credits it expects to receive later in the year. Penalties apply to prevent abuse of the over-franking concession;· where a company has over-franked a dividend at any time, or otherwise has a franking account deficit at the end of a year, the company is required to make a non-refundable payment shortly after the end of the year to make good this deficit. This payment is known as franking deficit tax;· special rules apply to franked dividends paid to a partnership or to a trustee of a trust. These rules ensure that the attached imputation credits flow through to each partner or beneficiary (or trustee if appropriate) in proportion to their share of the net income of the trust or partnership that is attributable to franked dividends ; and· special rules apply to prevent tax avoidance through franking credit trading schemes.
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