Company Franked Dividends & the ATO

I’m a new co-director and co-shareholder of a small Australian based pty ltd company that should make a capital gain (not property related) sometime in the future. Directors intend to retain the bulk of the gain in the company but also will pay or stream all the profit out as fully franked dividends over a number of few years to the shareholders. The company does have an existing income tax account with the ATO.

Paying dividends to shareholders is a completely new concept to me to get my head around.
What I need help to understand however, in order for the company to pay the franked dividends to its shareholders, do I need to go and advise ATO that it will be paying franked dividends or register the company for some kind of imputation or franking account with the ATO or not?

Are there any new taxation issues that might affect this that I needs to comprehend? Is it legal for the company to hold on to a capital gain it makes for say a number of years, understand it will be paying the full portion of Capital Gains Tax in the year the gains event occurs and then streaming out the profit as fully franked dividends to its shareholders or not?

Thanks for your helpful advice.

 

The company will notify the ATO of the franked dividends paid when it lodges a tax return. It is also obliged to notify shareholders of the franked dividend paid by way of a dividend statement.

In order for a company to pass on franked dividends it needs to have paid tax (or recieved a credit to its franking account).

The company directors can choose when to pay a dividend as long as they are acting in the best interests of the company, the company is solvent and their actions are not oppressive to minority shareholders.

 

Thank you Ross, what section of the ATO ITR would I need to focus on to notify ATO the company would be paying a franked dividend or do I need to lodge another seperate CGT schedule or a seperate Franking account tax return, please?

 

Item 8 label J, K, M and H of the 2016 Company tax return.

There are also some situations where you are required to lodge a franking account return - but normally it is not lodged. It is good practice to prepare one however to track the situation.

 

Thank you Ross.

 

Quite easy to keep a franking account ledger (you can set up a simple one in excel).

Income tax payments are credited to the account (usually your quarterly PAYG instalments). Note that a refund on lodgement of your annual tax return will be a debit to your franking account.

Franked dividends will debit your franking account by the applicable %. e.g. if your company has paid tax at 28.5% rate, then you frank your dividends at 28.5% (A dividend of $71,500 will debit your franking account by $28,500).

The maths is all funny now that the tax rates have gone under 30% - used to be a relatively simple 30/70 calculation

 

was the capital gain the company made eligible for any of the small business CGT concessions ?

that changes things.

 

Good question. The question really is a feature of the company being a seperate legal entity to its owners. The company can and will make a profit and pay tax - Lets simplify it and say its 30%. So it makes $100K profit and pays $30K in tax. It has a theoretical $70K bank balance. The compnay can choose when AND IF to pay a dividend. The company could also be wound up. Special rules prevent the unpaid income being classified as a capital gain however.

Tax payments when paid credit the franking account which is notional and reported in the tax return for the company. Its notional only and justa record of available tax credits. Some rules limit "games" eg paying a unfranking div to one shareholder and a FF div to another. Any games likely are a concern.

Lets say in year 2 the Directors resolve to pay $10K cash dividend. This means a FULLY FRANKED dividend will be paid and so the franking credits of 30/70th of the dividend will accompany the $10K transferred. Nothing is paid - Again its notional. The company does need to advise the dividend payment in the tax return using a special schedule. Penalties apply if it overlooks this task. Without it the ATO wouldnt know about taxable income for shareholders.

The shareholder/s would be assessed on the grossed up dividend of $10K + $4,285 franking credit. So lets assume the shareholder has no other income. They may get a refund of the franking credit of $4285 if eligible.

The company franking credit at the end of Y2 would be $30,000 less $4285 = $25,715