Government’s denial of the minimum tax offset doesn’t add up, says senior advocate

Treasury’s consultation paper said that allowing a corporate beneficiary to use the MTO would allow it to convert the offset into refundable franking credits that could be passed on to shareholders.

“Not allowing companies to access the minimum tax offset is the simplest mechanism to prevent the minimum tax being undermined by interposing a company between the trust and the ultimate beneficiary, without changing the imputation system,” the consultation paper reads.

NTAA’s submission on the exposure draft legislation argues the practical effect of the denial is the opposite of the one described in the consultation paper.

“Under the imputation rules, neither the MTO nor the payment of the minimum tax by the trustee generates franking credits; franking credits can be generated only from tax paid by the company. It’s not possible to convert a non-refundable tax offset into refundable franking credits by allowing the offset to the company. In fact, it does the complete opposite,” NTAA senior advocate Robyn Jacobson told the brand.

NTAA’s submission points to that part of the tax law which lists the events that create franking credits in a company’s franking account. A non-refundable tax offset is not one of them. There is no mechanism by which the MTO, or the trustee’s payment of minimum tax, generates a franking credit. The minimum tax is paid by the trustee, not the company, so it cannot generate a franking credit for the company.

NTAA illustrated the point with a trust that distributes $100,000 to a corporate beneficiary taxed at 30 per cent, with no other income.

If the MTO were allowed, the trustee would pay $30,000 of minimum tax, and the $30,000 offset would reduce the company’s own tax bill to nil. With no company tax paid, no franking credits would arise, so any distribution made to the shareholders would be unfranked.

“Because the company would have no tax to pay, because its tax liability would be entirely offset by the tax paid by the trustee, no franking credits would be generated, so a dividend paid to its shareholders would be unfranked,” Jacobson said.

Because the MTO is denied, however, the company must pay $30,000 of company tax on top of the trustee’s tax of $30,000. That payment of company tax will generate $30,000 of franking credits, allowing the company to pay a franked dividend.

“Franking credits are actually generated through the denial of the offset, because it’s forcing the company to pay tax,” Jacobson said.

The denial also produces double taxation. On $100 distributed to a corporate beneficiary, the trustee pays $30 and the company a further $30. A shareholder on the top marginal rate then pays $9.71 of top-up tax on the franked dividend, for an effective rate of 69.71 per cent.

“The government’s explanation, its justification, its rationale for denying the offset to corporate beneficiaries does not seem to stack up,” Jacobson said. 

“Denying the MTO increases the franking credits available to be attached to dividends; allowing it would generate none.”

NTAA has recommended that corporate beneficiaries be allowed the MTO to reduce their tax liability, without it creating a credit in the franking account. 

If the concern is that franking credits could be refunded to low-rate shareholders, that should be addressed directly rather than through economic double taxation, NTAA said.