What do the company tax cuts mean to you?
After much debating and deal making, the company tax rate cuts announced in last year’s Federal Budget have finally been passed by the Senate. So what do the company tax cuts mean to you?
The most important matter to understand is that the tax rate cuts only apply to businesses – the company tax rate for companies that earn passive income from such sources as interest, rents and dividends will still be taxed at 30%.
So for companies with turnover under $10,000,000, the tax rate for 2016/17 will be 27.5%. The same rate will apply in 2017/18 for those companies with turnover under $25,000,000 with progressive increases in the threshold turnover until it applies to all corporate businesses in 2023/24. Thereafter, the rate will reduce progressively down to 25%.
Businesses who trade through a corporate structure will benefit in that they will pay less tax (including PAYG Instalments). Their cash flow will improve.
So who won’t benefit:-
- Businesses who don’t trade through a corporate structure whether that be as a sole trader, partnership or trust (although there is a tax discount of up to $1,000 granted to non-corporate businesses).
- Corporate businesses who make a loss or have carried forward income tax losses. In this regard, it must be noted that it is said that half of all companies don’t make a profit.
- Those shareholders who are remunerated by dividend from their company as they will receive a lower imputation credit and will therefore either pay more tax or receive a lesser refund.
The last point is just as important to investors (including self managed super funds) as it is to shareholders of their own company.
So let’s compare the situation as we have known it with what happens if a (a) company pays out the same amount of dividend and (b) a company that pays out all after tax profits out as dividends.
|
To date at 30% company tax |
If company pays same dividend amount |
If company pays out same amount of pre-tax profit |
|
| Profit | 1,000 | 1,000 | 1,000 |
| Tax | 300 | 275 | 275 |
| Profit after tax | 700 | 725 | 725 |
| Assuming all paid out as a dividend | 700 | 700 | 725 |
| Franking credit | 300 | 266 | 275 |
| Taxable income | 1,000 | 966 | 1,000 |
| Individual’s tax at 39% MTR & M/care | 390 | 377 | 390 |
| Franking Cr claimed | 300 | 266 | 275 |
| Tax payable by shareholder | 90 | 111 | 115 |
| After tax money | 610 | 589 | 610 |
Companies will still be able to attach imputation credits to dividends at the same rate the company tax was paid. That said, it won’t be long before the 30% credits are used and the first column in the above table will be a thing of the past.
So what can you do to maximise your position? If you or your super funds is a shareholder in a public company, then your position will be dictated by the dividend pay out rate as resolved by the board and existing tax credits. However, if you are a shareholder in your own name, you may wish to change your strategy to better suit your circumstances both now and into the future. We would the opportunity to discuss your situation with you.
At MRS, we will spend today planning for your success tomorrow.
At MRS, we will spend today planning for your success.