Last week, the government announced it would accelerate the already legislated tax cuts for business under $50 million by bringing it forward by five years.
Labor has moved swiftly to support the plan that will see those companies facing a tax rate of 26 per cent by 2020–21 before finally dropping down to 25 per cent in 2021–22.
At present, the rates are scheduled to drop to 25 per cent by 2026–27.
Speaking to Accountants Daily, RSM senior manager Tracey Dunn said the fast tracking of the tax cuts could potentially leave companies and shareholders caught out because of franking credit implications.
“If you have a situation where a small business taxpayer, and quite often this impacts on primary producers who operate their farming businesses through companies, they may have retained the profit in their companies to fund growth and to fund their business operations and they may have significant retained profits in their companies and have significant franking credits at the 30 per cent tax rate,” said Ms Dunn.
“Now they are going to find that when they have to pay out those retained profits, it is the individuals shareholders who are going to have additional tax payable.
“So there will be a tax saving in the company but additional tax payable for the individuals which will outweigh the tax benefit that they receive from the reduction in the corporate tax rate.”
Further, Ms Dunn said the proposed changes to Division 7A coupled with the sped up tax cuts could see “significant pain” for shareholders.
“For taxpayers that I deal with, they are family-run businesses where it is the family members that are the shareholders that have significant retained profits and Division 7A loans,” said Ms Dunn.
“Where the impact potentially comes in is with the proposed changes to Division 7A that we’re still waiting for in terms of draft legislation and those proposed changes come in from 1 July 2019. If any of those small business taxpayers have Division 7A loans that they are going to have to repay and they are going to repay those with dividends, then you could find some shareholders are going to have significant pain.”