Tax Tip 287: How Capital Gains Through a Company can be Tax Free Companies pay a flat 30% tax on capital gains (or 27.5% in some cases). But this is not the final tax on that income as there is tax to be considered again when the income comes out of the company. Where the income of a company is paid out as a dividend the potential final tax rate could even be much lower than 30% - it can even be nil. People just assume companies pay 30% flat tax and often think no further. Example Homer has twins who are currently 16, but they will turn 18 in a few financial years. The trouble is that Homer, as director of Homer Pty Ltd wants to cause the company to sell a parcel of shares now as he thinks the market will drop. This will trigger CGT. Homer thinks, ‘bugger, a flat 30% tax rate’, but then realises this is not the final result. The capital gain from the shares is $100,000. Tax on this will be $30,000 in the hands of the company. The company also has $30,000 in franking credits as a result. Homer causes the company to sell and to retain the income (and perhaps to reinvest it). The twins become 18 in just over a year and can then receive income and be taxed at adult tax rates. They are still not working while studying and have no other income so Homer causes the company to pay a $30,000 dividend to the shareholders. This dividend goes to the trust which owns the shares and Homer controls this trust as well and causes the dividend income to go to his 2 daughters in equal shares. They get $15,000 in dividends each, but they also get the franking credits as well as the dividend was fully franked. The franking credits on $15,000 in fully franked dividends is $6,428 making a taxable income of $21,428 per twin. On a taxable income of $21,428 there is no tax payable. So each twin gets $6,428 refund from the ATO due to how the imputation system works. The company has paid out $30,000 and $12,856 in credits It still has $40,000 in retained earnings plus $17,144 in franking credits. The next year the company does the same thing – it pays another $30,000 dividend out and the twins pay no tax as they are still not working. After the second year the company has just $10,000 in retained earnings plus $4,288 in franking credits. In the 3 year the twins are working at Maccas while attending uni and they each earn $13,000 per year in income from this. The company pays another $10,000 in dividends to the trust and then $5,000 to each plus $2,142 in franking credits. This equates to $7,142 in taxable income plus the $13,000 from work means $20,142 in taxable income and no tax payable. In this situation the company did not get a 50% discount when it sold its shares, but the income from the capital gains was able to be taxed initially but with a refund for all of the tax paid at a later date so the end tax rate was zero. Ps. I am not a trained mathematician so the figures may be out so use this as a general guide only and get tax and legal advice before considering ownership structure for holding shares. Note that the same result could have been achieved whether the investment vehicle was a trust or a company.