DISTRIBUTABLE PROFIT EXCEEDS TAXABLE INCOME AND DIVIDEND FRANKED TO LESS THAN 100% PDF

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DISTRIBUTABLE PROFIT EXCEEDS TAXABLE INCOME AND DIVIDEND FRANKED TO LESS THAN 100%...

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EXAMPLE 14: DISTRIBUTABLE PROFIT EXCEEDS TAXABLE INCOME AND DIVIDEND FRANKED TO LESS THAN 100% Assume the facts in Example 13 with the variation that, although James Pty Ltd’s taxable income remains $100,000,000, its pre-tax distributable profit (which includes the $100,000,000 of pre-tax taxable income) is $200,000,000. After paying tax of $30,000,000 it pays a dividend of $170,000,000 The franking credit on this distribution is $30,000,000. Joyce receives a distribution of $170,000 with a franking credit of $30,000 attached. The franking percentage on the dividend and the tax effects for Joyce would be as follows: Assessable income James Pty Ltd Profit $200,000,000 Income $100,000,000 Tax $30,000,000 = $30,000,000 franking credits Distribution $170,000,000 Retained earnings $ 30,000,000 Maximum franking credit $72,857.14 = $170,000,000 × 30/70 Franking credits allocated $30,000,000 Franking percentage 41.18% Joyce Distribution $170,000 (included in income via ITAA36 s 44(1)) s 207-20(1) inclusion $30,000 Other sources $60,000 Assessable income $260,000 Deductions $0 Taxable income $260,000 Tax payable at 2018-19 rates $ $90,097 Medicare levy $5200 making total tax and Medicare $95,297 s 207-20(2) tax offset $30,000 Net tax payable $65,296 After-tax income $170,000 + $60,000 = $230,000 - $65,297 (net tax payable) = $164,703 . This is because the $30,000 franking credit is just a credit it is not cash received. One way of conceptualising the effect of the dividend imputation system in this situation would be as follows; With a distribution of $170,000 you can conceptualise that part of it ($70,000) can be regarded as a distribution of the taxed profits while the other part $100,000 is a distribution of untaxed profits. The effect is that the $70,000 is taxed at the shareholder level at the difference between the corporate rate of 30% used here and the shareholder's average rate + medicare of 36.65% (ie $95.297/$260,000) while the $100,000 is effectively taxed at the shareholder's average rate of 36.65%. So the $70,000 is effectively grossed up to $100,000 by the franking credit and taxed at a net rate of 6.65% making $6,650 of the total net tax being attributable to this part of the dividend while $36,650 of tax was payable on the $100,000 portion of the dividend representing a distribution of untaxed profits and $21,990 of other income was taxed at the average rate of 36.65%. If we divide it up this way to illustrate what the imputation system is really doing then $6,650 (net tax on franked portion) + $36,650 (tax on unfranked portion) + $21,990 (tax on other income) = ^$65.290 total tax (the $7 shortfall is a product of rounding the average rate to two decimal places)....