CGT & Companies

Hi Guys

I hope you have all been well. This forum has been very useful to read through so i was hoping someone might shed some light for me on a particular thought;

If i have a company holding my capital property, on it's sale I assume I believe the capital gain is assessed at the company tax rate of 30% (or 28.5%). If this company then distributes to shareholder (myself), then would a franking credit be attached for the capital gain? If so then I believe in this scenario a franking credit refund is also obtainable on $100k.

Company
Capital Gain $100,000
Company Tax $30,000
Retained Earnings 70,000
Distribute to
Shareholder 70,000 with 30k franked dividend
Tax Payable (pre-franking credit) $14297

Not sure if i am missing anything as it would seem this would be much better than holding property in my own name and paying CGT myself .

Cheers

 

Assessable income for a resident shareholder will include the $30,000 franking credit.

In other words, basic income tax is based upon $100,000.

Then a tax offset of $30,000 wil be applied.

Net result is tax is collected on $100,000 at your marginal rate, however the first $30,000 has been collected from the company.

If you had the capital gain in your own name, you would have had access to the general 50% CGT discount.

 

See my recent tax tips on this.

 

Sorry am a bit slow today - you are completely right, forgot about the gross up.

But then using 100k as the example :

Capital Gain $100,000
Company Tax $30,000
Retained Earnings 70,000
Distribute to
Shareholder 70,000 with 30k franked dividend
Tax Payable (Grossed up 100k) 24947
Less offset 30000
= Refundable frankign credit?

Conversely if it was in my own name:

Individual
Capital Gain $100,000
CGT Payable $37,000
Income tax payable on $18,500.0 (after discount)
= Nil / close to nil.

Is there anythingn wrong with my assumptions above?

 

I did find your legal tip 55 thread - looks like this is exactly what i was talking about - haven't finished it yet, still looking through the somersoft archive verison. Thanks so much

 

Also a recent tax tip in the last few days on franking credits.

 

Are you eligible for the 50% discount on cgt for holding the property for 12 months? That'd halve the tax bill.

 

No 50% discount for companies

 

Has been factore dinto scenario 2 i think, unless you are talking about something else?

 

your threads are an absolute gold mine for knowledge. really appreciate it.

It seems from the two threads that the scenario above is doable, but the relationship between distributions and frankign credit has to be managed properly for the proper benefit. (e.g more ideal if there are kids above 18 but with no income).

 

One of the issues to consider is timing of tax payments. If the profit is in 2016 then the tax may only be payable in 2017 year and so a FF div could only occur after the 2016 year. Strategy could include prepaying tax etc

The key issue is that the FF div is assessable at your marginal tax rate (incl Medicare 2% and budget repair levy ?) on the $100K ... Take that tax shortfall and reduce it by the $30K franking credit. Thats the final tax shortfall. The reality is that the full and final tax on profit is based on YOUR marginal tax rate. The company tax rate only part pays the tax.

Then you also lose access to the 50% CGT discount so the greater the gain the more tax you pay under a company AND the more the shortfall. That said if you time the dividends to periods after ceasing work you could also get a refund of franking credits and lower the marginal rate. Thats a very specific strategy.

Private health insurance tax offset (loss)?. budget repair levy, HELP debt and any child care benefit etc could all be affected by this.

Also this is a passive investment ?? If its a business use property there could be very different outcomes as companies can access small business concessions

 

"One of the issues to consider is timing of tax payments. If the profit is in 2016 then the tax may only be payable in 2017 year and so a FF div could only occur after the 2016 year. Strategy could include prepaying tax etc"

A company CANNOT voluntarily pay income tax to generate a franking credit. ID 2004/836 says a franking credit will only arise where a PAYG instalment is made for an existing liability.

If you don't have an existing liability (which you wouldn't until June 30 2016) then making a prepayment won't help with generating a franking credit

The company could pay a dividend and pay the Franking Deficit Tax Liability by 31 July. By doing so the company will be entitled to a FDT offset.

 

Yes such strategies always need guidance / advice as you explain...A company can voluntarily increase its PAYG instalment rate by variation if it has an instalment rate but if it had been withdrawn from instalments yes that can a issue. And then if that doesnt work I would follow the FDT offset path. FDT could be affected by a dividend paid earlier in the year possibly ?

All reasons for effective tax planning prior to June.