Certain loans, payments and forgiveness of debts by private companies to their shareholders and associates can give rise to unfranked dividends, which are assessable to the shareholders and associates. Try to repay any loans or payments by the earlier of the actual lodgement date or due date for lodgement of the company’s return for that year. Alternatively, appropriate loan agreements should be in place.
Review whether a trust has an unpaid present entitlement to a corporate beneficiary. Potentially, an unfranked dividend (from the company to its shareholders) can arise. Try to repay any unpaid entitlement to the corporate beneficiary by the earlier of the actual lodgement date or due date for lodgement of the trust’s return for that year to avoid an unfranked dividend from arising
Personal Services Income
If an individual applies personal efforts and skills in performing services for third parties through an interposed entity (company, trust or partnership), the personal services income rules may instead deem the individual to be assessable on the income generated, unless one of the required personal services business tests is satisfied or a determination is obtained from the Tax Office.
Identify any unusual circumstances that will prevent the tests from being satisfied. A determination will be granted only if there are unusual circumstances
Non-commercial Losses
A loss from an individual’s business activity (whether carried on alone or in a partnership) may only be offset against other income derived in the same income year if the business activity satisfies at least one of the four commerciality tests or a determination has been obtained from the Commissioner.
Consideration should be given to the relevant tests, as the individual’s overall tax position will be impacted when the loss is deferred
Small Business Entities
Consider whether an entity satisfies the requirements to be classified as a small business entity. A small business entity can access various tax concessions, such as the simpler depreciation and trading-stock rules. (The small business entity regime replaced the STS from 1 July 2007. The definition of a small business entity is broader than that of an STS taxpayer.)
Companies
Ensure that all distributions to shareholders during the franking period are franked to the same extent to avoid a franking deficit tax.
A private company has four months after the end of the income year to provide its shareholders with a distribution statement for dividends paid. In effect, the company can retrospectively correct any overfranking or underfranking of distributions
Trust Distributions
If a trust has derived capital gains and the income and capital beneficiaries are different, consider whether an election needs to be made to avoid the anomaly if the former will be taxed on the capital gains rather than the latter.
The trustee distributes the accounting profit, and not the taxable profit, of the trust.
It is the Commissioner’s practice that a trustee has up to two months after the end of an income year to distribute the previous year’s net income. (The distribution is still assessable in the previous income year.)
If a trustee is distributing income to a minor (i.e. under 18), the minor can receive up to $1,667 in non-taxable distribution.
If possible, consider distributing all the income of the trust to its beneficiaries. Income that is retained in the trust will be taxed at 46.5% to the trustee.
If a company is owned by a discretionary trust, consider the necessity for the trustee to make a family trust election to ensure any losses or bad debts incurred by the company will be deductible.
If shares are owned by a discretionary trust, consider the necessity for the trustee to make a family trust election to ensure any franking credits attached to the dividends will not be “wasted”.
If a family trust election has been previously made, try to avoid distributing outside the family group to avoid any potential liability to the family trust distributions tax
