2017 Tax Planning Checklist: Companies

Company Income Tax Rates

Reduced rates of company tax apply to companies that are 'small business entities', i.e. companies which actively conduct a business and have a turnover of less than $10 million.  Other companies which are not 'small business entities' continue to be taxed at 30% for the 2017 income year. 

The tax rates for 'small business entities' is based on the company’s aggregated turnover of the company and its connected entities and affiliates. The rates are as follows:

The rates are as follows:
 
Turnover Tax Rate Commencement
Up to $10 million 27.5% 2016/2017
From $10 million to $25 million 27.5% 2017/2018
From $25 million to $50 million 27.5% 2018/2019

Companies who anticipate that their aggregated turnover may marginally exceed $10 million in 2016/17 should consider strategies that could be adopted to qualify for the lower tax rate e.g. defer invoicing/sales.

Franking Account

A company’s dividend payments and franking profile should be reviewed before year end to ensure sufficient franking credits are available for any planned dividend. Broadly, the maximum franking credit allocated to a franked distribution is based on the company’s tax rate.

In the case of taxpayers who are eligible for the reduced income tax rate, new rules apply in the 2017 year to determine the extent to which dividends may be franked. The rules are not straightforward in that the legislation requires you to determine for the dividend year the “corporate tax rate for imputation purposes” (broadly, the company’s income tax rate in the current year but based on aggregate turnover for the previous tax year) and then apply a formula to work out the available franking credit.
   
Franking credits may be available at 30% for those companies with a reduced tax rate – but in limited circumstances and advice should be sought from your Moore Stephens advisor.

Company Loans

Shareholder loans need to be properly documented and put on a commercial footing in line with the Division 7A tax legislation.

The ATO is undertaking audit work to ensure payments made by private companies are correctly accounted for and company loans are not used to distribute tax-free profits.

Loans to private company shareholders or their associates include lending money to a shareholder, paying expenses on the shareholder's behalf or forgiving the shareholder a debt.

The term of the loan is set out in legislation. If there is no security offered, the term of the loan should not exceed seven years.  If security is offered, the loan should not exceed twenty-five years and the loan must be fully secured by a registered mortgage over real property. The market value of the property at the time the loan is made should be at least 110% of the loan amount.

Interest rate to be charged during 2016/17 is 5.40%

If loans have been made to shareholders or their associates which do not meet the above provisions, then the payment may be a deemed dividend and included in the assessable income of the shareholder.