Companies

The tax treatment of companies will depend on their classification, ie as a private or public company. For example, only a private company is subject to the operation of Div 7A of ITAA 1936. Companies are subject to a flat rate of tax (currently 30%) on the entirety of their taxable income. This rate applies whether the company is public, private, resident or non-resident.

Dividends – benchmarking rule

Companies should ensure that all dividends paid to shareholders during the relevant franking period (generally the income year) are franked to the same extent to avoid breaching the benchmark rule.

If an entity to which the benchmark rule applies franks a distribution in breach of the benchmark rule (by either over-franking or under-franking the distribution), the recipient of the distribution will still be able to get the benefit of the franking credits attached to the distribution, but a penalty (in the form of over-franking tax or a debit) will be imposed on the entity.

Loans and payments by private companies

Loans, payments and debts forgiven by private companies to their shareholders and associates may give rise to unfranked dividends that are assessable to the shareholders and associates. To minimise any adverse Div 7A consequences, taxpayers must consider the following.

For loans by a private company, taxpayers should:

• repay private company loans by the earlier of the actual lodgment date or the due date for lodgment of the company’s return for that year;

• ensure a loan agreement is in place by the earlier of the actual lodgment date or the due date for lodgment of the company’s return for that year; and

• ensure the interest rate on the loan for years of income after the year in which the loan is made equals or exceeds the "benchmark interest rate" for the year.

For payments by a private company:

• s 109C(3) contains an extended definition of "payment", which includes the crediting of amounts to, on behalf of, or for the benefit of an entity, and the transfer of property to an entity. If property is provided, companies should consider requiring shareholders to pay market value;

• the concept of "payment" also extends to the provision of an asset for use by a shareholder or the shareholder's associate. If a company-owned asset (eg a boat, etc) is made available for use by shareholders or their associates, companies should consider requiring payment of an arm's length fee or ensuring they retain full and unfettered access to the asset; and

• s 109D(4A) allows a payment by a private company to a shareholder (or an associate) to be converted into a loan before the lodgment day for the company's tax return. The loan can be repaid (before the lodgment day) or a written loan agreement that complies with s 109N may be entered into.

For debts forgiven by a private company:

• a debt is also taken to be forgiven (even if it has not actually been forgiven) if a reasonable person would conclude (having regard to all the circumstances) that the private company will not insist on the entity paying the debt or rely on the entity's obligation to pay the debt; and

• a deemed dividend may arise if a shareholder dies and the debt is forgiven during administration of the deceased’s estate (and the dividend will be taken to be paid to the legal personal representative of the shareholder).

Other considerations include that:

• payments under a guarantee can trigger a deemed dividend and must be considered carefully;

• a deemed dividend can only arise to the extent of a company’s distributable surplus, so this issue needs to be considered along with planning opportunities; and

• the exemptions available should be considered and used if possible.

Section 109RB gives the Commissioner a discretion to disregard a dividend that would otherwise be deemed to arise under Div 7A, or to allow the company to frank a deemed dividend, where the failure to satisfy Div 7A is the result of an honest mistake or inadvertent omission. The meaning of these terms is considered in Taxation Ruling TR 2010/8. A request for the discretion must be lodged in writing.

Taxpayers should ensure that any loans or payments are repaid by the earlier of the due date for lodgment of the company's tax return or the actual lodgement date. If repayment is not made, taxpayers should ensure that loan repayments and applicable interest are documented through loan agreements between the taxpayer and related party.

• NOTE: Practice Statement Law Administration PS LA 2011/29 provides guidance for ATO staff exercising the discretion. The Practice Statement describes a two-step procedure, the first step being the identification of an honest mistake or inadvertent omission giving rise to a Div 7A deemed dividend, and the second step being the application of factors in s 109RB(3) to determine whether the discretion should be exercised. Potentially relevant matters include the sophistication of the taxpayer, corrective action (if any) taken by the taxpayer, the complexity of the Div 7A provisions at issue, and whether the taxpayer should have sought professional advice.

Research and development

Companies should consider whether they have undertaken eligible research and development (R&D) activities that may be eligible for the R&D tax incentive. Eligible R&D activities are experimental activities that are conducted in a scientific way for the purpose of generating new knowledge or information. Note that the R&D tax incentive requires contemporaneous documentation in relation to the projects undertaken and expenditure incurred.

The R&D tax incentive provides two types of tax offsets:

• a 45% refundable offset for smaller companies; and
• a 40% non-refundable offset for larger companies and companies controlled by tax-exempt entities.

The R&D tax incentive is jointly administered by the ATO and AusIndustry (on behalf of Innovation Australia). The company's R&D activities need to be registered with AusIndustry within 10 months of the end of the income year. For example, this means that companies with a standard year of income of 1 July 2011 to 30 June 2012 who wish to apply for the R&D tax incentive for the 2011–2012 income year must lodge their application with AusIndustry by Tuesday, 30 April 2013. Information on registration requirements, including forms, is available on the AusIndustry website at www.ausindustry.gov.au/programs/innovation-rd/RD-TaxIncentive/Registration/Pages/default.aspx.

Quarterly credit arrangements are due to start from 1 January 2014 for the 45% refundable offset. This will allow a small company to anticipate the refund by receiving quarterly credits. These credits will then be subject to a reconciliation on assessment. (See Treasury’s exposure draft legislation available at www.treasury.gov.au/ConsultationsandReviews/Submissions/2013/R-and-D-tax-incentive-quarterly-credits.)

Tax consolidation

Companies may want to consider consolidating for tax purposes prior to year end in order to reduce compliance costs and take advantage of tax opportunities available as a result of the consolidated group being treated as a single entity for tax purposes. However, a careful analysis of an entity’s circumstances should be undertaken prior to making such a decision.

Carried forward losses

Companies should carefully consider whether any deductions are available for any carried forward losses, including analysing the continuity of ownership test and the same business test.

Proposed loss carry-back regime

The Government has proposed legislative amendments to the tax law to allow corporate tax entities that have paid tax in the past, but are now in a tax loss position, to carry their loss back to those past years to obtain a refund of some of the tax they previously paid. This will be done through the mechanism of a refundable tax offset. The loss carry-back will be limited to a $1 million ceiling. Also, from 1 July 2012, the carry-back will be limited to one year, while from 1 July 2013 losses will be able to be carried back against tax paid up to two years earlier. (See Tax and Superannuation Laws Amendment (2013 Measures No. 1) Bill 2013 – still before the House of Representatives at the time of writing.)

Monthly pay-as-you-go (PAYG) instalments proposed

The Government has released draft legislation proposing to implement its 2012–2013 Mid-Year Economic Financial Outlook announcement to introduce monthly PAYG instalments for large taxpayers over a three-year period, depending on the amount of their base assessment instalment income (BAII). According to the Government, the proposed changes will allow PAYG instalments to be more responsive to the economic conditions faced by businesses, and will better align PAYG instalment payments with the GST payments of most large corporate tax entities.

The draft legislation proposes to amend Div 45 of Sch 1 to the Taxation Administration Act 1953 to require certain large corporate tax entities to make PAYG instalments monthly rather than quarterly or annually. Under the changes, if a corporate tax entity's BAII exceeds a certain threshold (proposed to be $20 million or an amount prescribed by regulation), the entity will be a "monthly payer" liable for monthly PAYG instalments. The Government says the $20 million threshold broadly aligns with the GST threshold for being a monthly GST reporter.

The Government proposes to transition corporate tax entities to the monthly PAYG instalment system over a three-year period as follows:

• from 1 January 2014, corporate tax entities with a BAII of $1 billion or more will be required to make PAYG instalments monthly;

• from 1 January 2015, corporate tax entities with a BAII of $100 million or more will be required make PAYG instalments monthly; and

• from 1 January 2016, corporate tax entities with a BAII of $20 million or more will be required make PAYG instalments monthly.

(For further information on these proposals, see Treasury’s exposure draft legislation available at www.treasury.gov.au/ConsultationsandReviews/Submissions/2013/Monthly-PAYG-instalments-for-large-taxpayers.)