The government has previously announced it would commit to gradually reducing the company tax rate from 30 per cent to 25 per cent over 10 years.
HLB Mann Judd tax partner Peter Bembrick said the recent reduction in company tax rates has been positive for small business, however the failure to apply the changes to similarly sized investment companies, as well as confusion over when a company is ‘carrying on a business’, has “created unnecessary complexity”.
However, he added that as long as the company tax rate is less than the marginal tax rate of individual shareholders, there is opportunity to reduce, or delay, payment of some of an individual’s overall tax liability.
“While the proposed lowering of the individual tax rates for many people is to be applauded, it means that the rate differential will often be relatively insignificant until the top tax bracket of 45 per cent, when it suddenly becomes a big deal,” Mr Bembrick said.
“Opportunities arise when it is possible to earn income through a company and retain the funds in the company, or at least spread the payment of dividends out of the company over more than one tax year.”
Mr Bembrick noted the budget did contain a couple of targeted measures aimed at restricting the tax benefits from Everett assignments, and similarly where sportspeople and entertainers have been able to licence their image rights to a related entity.
Those cases aside, he said the tax rate changes make it even more critical to carefully plan the timing of payment of dividends to shareholders, as well as keeping an eye on the balances of shareholder loan accounts.
“The risk of deemed dividends under the Division 7A rules is often managed by declaring franked dividends and crediting the dividend in repayment of the loan account, and this in turn has a bearing on the dates at which dividends must be declared,” Mr Bembrick said.