The government previously announced it would cut the company tax rate to 28.5 per cent from 1 July 2015 with the intention being the rate cut would be accompanied by a 1.5 per cent paid parental leave (PPL) levy applied to companies earning more than $5 million in taxable income.
However, with the government announcing last month that the PPL scheme would no longer proceed, KPMG tax partner Alia Lum has said there is now uncertainty over whether the PPL levy will be replaced by a 1.5 per cent childcare levy, or whether larger companies will simply continue to be taxed at the current 30 per cent rate.
According to Ms Lum, this will have significant implications for franking credit purposes.
“Unlike a tax payment, a levy payment is unlikely to generate franking credits. If a levy is used to replace the tax rate cut for larger companies, dividend payments from those companies can only be franked at a 28.5 per cent rate post-1 July 2015,” Ms Lum said.
“This means that shareholders who are higher rate taxpayers will ultimately bear more tax on their investment income, and superannuation funds and lower rate individual taxpayers will receive a reduced refund of franking credits. Companies may also end up with ‘trapped’ franking credits.”
Ms Lum said there has been a recent push by fund managers for listed companies to pay out more dividends prior to 1 July 2015 to ensure greater value is passed on to investors through payment of franking credits at the current 30 per cent rate.
“However, this could be unnecessary if a 30 per cent tax rate continues to apply post-1 July 2015,” she said.
“With less than three months to go before the rate cut is due to commence and still no government announcement on how it will proceed, there will be a decreasing window of time available for companies to determine their dividend payout and for fund managers to plan their investment strategies.”
In response to this uncertainty, Ms Lum warned businesses to make sure they have a dividend strategy in place and ready to implement as soon as the government clarifies its position.