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Company tax is levied on the taxable income of a company each financial year. The following summarises this process and some of the pros and cons of paying company tax.
The company tax rate had remained a flat 30% for many years. For the 2016 financial year the rate for small business reduced to 28.5% and is set to reduce further to 27.5% from 1st July 2017. In comparison individual tax rates vary according to income thresholds, from 0% up to 49% including Medicare and the Temporary Budget Repair Levies. In this sense a company tax rate can be considered a ceiling tax rate, and an alternative for excess income derived in a year. example: Tim and Tom operate competing electrical businesses, and each made a profit of $200,000. Tim is a sole trader and his personal tax bill was $66,547. Tom is a company which paid him an 80,000 salary with a tax bill was $18747, plus $36,000 company tax. Tom saved $11,800 tax.
An important distinction between company tax and other taxes is that it is not a final tax, as once paid it becomes a tax credit which can then be passed on to shareholders in a year of your choosing. It is also a potentially refundable tax credit, should the recipient have a lower tax payable in that year.
The imputation system allows for any company tax paid to be carried forward as a franking credit. In turn this tax credit may be distributed to shareholders as franked dividends to apply against tax payable, with any excess refunded (excepting company shareholders). example: In the following year both Tim and Tom recorded nil profit due to economic downturn. Tim had nil tax payable. Tom's company paid nil tax but issued him dividend income of 80,000 with 24,000 tax credits. After tax of $18,747 he received a refund of $5253 from excess franking credits.
Company tax is levied on Taxable Income, not Accounting Profit nor Taxable Profit, and the difference can be significant. Accounting Profit is firstly adjusted for any ATO treatments or provisions to arrive at Taxable Profit, and then this may be be further reduced by prior-year Tax Losses to arrive at the Taxable Income of a company.
Company profit is calculated using accepted accounting principles and these generally also apply to the calculation of taxable profit. A Profit & Loss, or Income Statement, will classify income and expense amounts, and allocate other amounts of a capital or personal nature to your Balance Sheet. Your company tax return includes the totals from these reports, as well as some specific items considered important or high risk.
Profit is then adjusted for any variations arising from required ATO provisions or treatments to arrive at Taxable Profit. A tax reconciliation will include these adjustments in a tax reconciliation within the company tax return. The outcome in some cases can be vastly different due to the non-deductibility or assessibility of certain items. Common examples are fines or unpaid superannuation.
The Taxable Profit of a company for a financial year may be further reduced by Tax Losses remaining from a prior year. The final outcome is the Taxable Income or Loss of a company. The overall Taxable Income or Loss can be substantially different from the profit or loss recorded in the companies accounting reports.
Where a loss occurs there will be no company tax payable, and tax losses may be carried forward indefinitely to be offset against future taxable profits. The losses need to be recorded each year, and a schedule lodged if exceeding $100,000, and either one of two tests must be satisfied.i. the company ownership may not have changed by more than 50%, or ii. the nature of business has remained the same
Tax is calculated at a flat 30% and this forms the company's Primary Tax Liability. This may be reduced in the Tax Return by by a number of Tax Offsets, then by any Tax Credits, such as Withholding Tax deducted from income. A final reduction occurs from any PAYG Instalments prepaid by the company. The net amount is the amount payable or refundable by the company.
A number of specific offsets exist which will reduce the primary tax liability. In the instance of a loss, or excess of offsets, some of these may become refundable to the company, such as the R&D Concession Offset. In other cases the offset may be non-refundable but can be carried-forward to utilise in following years. Other offsets may be lost entirely if not used in that year. This commonly occurs when a company receives franked dividends, as the tax credit is treated as a non-refundable offset.
A common example is where a company receives franked dividendsof theis is the Dividend Imputation Credit offsetTax is calculated at a flat 30% and this forms the company's primary tax liability. This may be reduced in the Tax Return by by a number of Tax Offsets, culminating in a net Tax Payable.
30%generally apply to the calculation of a company's accCompany tax is levied on Taxable Income, not Accounting Profit nor Taxable Profit. Accounting Profit must be adjusted for any non-deductible items to arrive at taxable profit, and then this may be be further reduced by tax offsets or prior-year losses to arrive at the Taxable Income of a company.
Company tax may also be refundable under new provisions for the 2013 year where a loss has been incurred. Subject to conditions, tax paid in the preceding 2012 financial year can be refunded to the company.
Company tax may also be refundable under provisions for the 2013 year where a loss has been incurred. Subject to conditions, tax paid in the preceding 2012 financial year can be refunded to the company. However this was withdrawn for the 2014 and subsequent years.
A Franking Account records such company tax paid, and any subsequent distributions or other adjustments. The balance is calculated on a cash basis, ie when tax is actually paid rather than accrued/owing. Instalments of tax or receipt of other tax credits will generally result in an immediate increase to the franking account, while tax refunds or distributions will reduce it.
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