Company Tax – Introduction
For taxation purposes, a company is defined at section 995-1 of Income Tax Assessment Act 1997 (ITAA 1997) to include body corporates and any other unincorporated associations or bodies of persons. Partnerships are excluded from the definition.
A company is a taxpayer in its own right for income tax purposes.
Companies can be private (privately owned) or public (publicly owned). If a company is a private company, it is subject to the rules concerning loans and certain payments to shareholders and their associates in Division 7A and section 109 ITAA 1936.
A private company is defined as a company which is not a public company in the year of income.
A company will be a public company if it satisfies one of many tests, the most common being ordinary shares in the company are listed on a stock exchange in Australia or overseas on the last day of income.
TREATMENT OF ESTABLISHMENT COSTS
Write-off of blackhole capital establishment costs
Section 40-880 of ITAA 1997 provides that the blackhole capital costs of establishing a company can be written off over a 5-year period on a straight-line basis, with no apportionment required for expenditure incurred part way through the year.
Business restructuring costs and business equity raising costs and other capital blackhole expenditures can also be written off on this basis.
GST and pre-establishment costs of a company
The general rule is that input tax credits are not available unless an entity is registered or required to be registered for GST. However, Division 60 of A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) enables input tax credits to arise in some circumstances in which acquisitions and importations are made before a company is in existence.
The input tax credits are only allowed in relation to pre-establishment acquisitions and pre-establishment importations.
An acquisition or importation is a pre-establishment acquisition or importation if:
- the thing acquired or imported is not applied for any purpose other than for a creditable purpose relating to a company not yet in existence; and
- the company comes into existence and becomes registered within 6 months after the acquisition or importation; and
- the person who incurred the costs becomes a member, officer or employee of the company; and
- that person has been fully reimbursed by the company for the consideration provided for the acquisition and in the case of importations, is fully reimbursed by the company for the GST on the taxable importation and the cost of acquiring or producing the thing imported; and
- that person is not otherwise entitled to an input tax credit for the acquisition or importation; and
- the acquisition is not otherwise a creditable acquisition by the company.
The input tax credits can be claimed by the company once the company is in existence. They will be attributable to the tax period in which the full reimbursement was made, and the company holds a tax invoice.
The person establishing the company does not need to be registered for the company to qualify for the GST credits on the pre-establishment costs.
ISSUE OF SHARES
For GST purposes, the issue of shares by a company is treated as an input taxed supply by the company and there will not be GST charged on the sale.
The issue of shares is not regarded as a disposal of the shares by the company for CGT purposes. There is no deduction for the issue of shares.
DETERMINING TAX PAYABLE BY A COMPANY
Resident and non-resident companies pay tax at a flat rate. The full company tax rate of 30% applies to all companies that are not eligible for the lower base rate entity tax rate of 25%.
Taxable income of a company is its assessable income less all allowable deductions.
Companies have no tax-free threshold and do not pay the Medicare levy.
Special rules apply in relation to the imputation system, capital gains, carry forward of losses, and research and development.
Companies pay tax under the pay-as-you-go (PAYG) system.
All companies make quarterly PAYG tax instalments regardless of size. Smaller companies and new entities may only have to make annual instalments.
PAYG instalments are due on 28th October, February, April and July. Companies are also required to self-assess their final tax liability for a year of income and lodge a return specifying their taxable income and the amount of tax payable on that income.
Clubs, societies and associations
Clubs, societies and associations required to pay income tax are generally treated as companies for income tax purposes. Their taxable income is calculated in the same way as for companies apart from a special rule with respect to mutual income.
Non-profit clubs, societies and associations that are treated as companies (referred to as non-profit companies) have the benefit of special rates of tax.
If the non-profit body is a charity, it is income tax exempt. Note however that even if a non-profit body is exempt from income tax, it may still have PAYG withholding, FBT, the superannuation guarantee and GST obligations.
THE IMPUTATION SYSTEM
The imputation system provides for shareholders to receive an offset for the tax paid by the company against their own tax liability on distributions received from the company. Where the offset exceeds tax payable by the shareholder, a refund of excess offset is often available.
The tax paid by the company is imputed to the shareholder by the attaching of “franking” credits to the distributions made by the company.
Fully franked dividends are distributions of profits by a company where the whole of the profits reflected by the dividend have been fully taxed.
Partially or unfranked dividends are distributions of profits where only some or none of the profits have been taxed in the company’s hands (e.g. because they represent the gain on the sale of a pre-CGT asset).
A distribution statement is issued for each distribution by the company to indicate to the shareholder the amount of franking credit (if any) allocated to that distribution.
The capital gains tax provisions apply to companies. A net capital gain for the year will be included in the company’s assessable income (note capital gains are not included when determining PAYG instalments through the year).
A net capital loss is carried forward and offset against capital gains in future years.
Unlike trusts and individuals, companies do not qualify for the 50% discount on the disposal of assets that have been held for more than 12 months.
Small business CGT concessions
Although companies can qualify for the small business CGT concessions (where they satisfy all the necessary criteria), it should be noted that it can be difficult to get the amount out of the company in a tax-free form.
For example, with the 15-year exemption, the amount must be paid out within 2 years to a significant individual (as defined) or his/her spouse who has an interest in the company.
With the active asset discount, the exempt amount when distributed will be taxed as a taxable unfranked dividend.
Currently there are two major tests that govern the carry forward of losses of company. They are the continuity of ownership test and the same business test. The company must satisfy one of these tests to carry forward a tax loss.
Continuity of ownership test
This test requires that shares carrying more than 50% of all voting, dividend and capital rights be beneficially owned at all times during the ownership test period by the same people and in the same proportions.
The ownership test period is the period commencing from the beginning of the year in which the loss was incurred until the end of the year in which the loss is recouped.
Same business test (SBT)
If the company cannot meet the continuity of ownership test, it is necessary to satisfy the same business test to carry forward its losses.
This test requires that (at all times in the year in which it is desired to claim the deduction for the prior year loss):
- the company must carry on the same business (meaning the business of the company as an entirety) as it carried on immediately before the change in ownership (same business test); and
- the company must not derive income from a business (meaning a particular undertaking or enterprise) of a kind that it did not carry on before the change in ownership (additional business test); and
- the company must not derive income from a transaction of a kind that it had not entered into during its business operations before the change in ownership ( new transactions test), and
- not enter a scheme to get around the above tests (i.e. entered into a new business or new transactions before the change in ownership so that the same business test would be satisfied after the change in ownership).
Subdivision 165-CA ITAA 97 makes the ability of a company to set off a net capital loss of an earlier income year against capital gains in a later year subject to the same conditions that it must satisfy to deduct a tax loss of an earlier income year. That is, a company cannot apply a net capital loss of an earlier year unless:
- it has the same majority ownership and control throughout the loss year and the income year; or
- it carried on the same business and did not enter into new kinds of business or transactions.
RESEARCH AND DEVELOPMENT (R&D) OFFSET
Companies may qualify for an offset where they conduct R&D activities.
The size and the nature of the offset depends upon the turnover as well as the amount of R&D expenditure incurred by the company:
- a company with a group turnover of less than $20m may qualify for a 43.5% refundable offset; and
- a company with a group turnover of $20m or more may qualify for a 38.5% non-refundable offset.
These rates only apply to R&D expenditure up to $100m.
In the May 2018 Budget, changes were announced which are proposed to take effect for income years starting on or after 1 July 2018.
For companies with aggregated annual turnover of $20 million or more:
- the Government will introduce an R&D premium that ties the rates of the non-refundable R&D tax offset to the R&D intensity – that is, the proportion of R&D expenditure over total annual expenditure. The marginal R&D premium will be the claimant’s company tax rate plus:
- 4 percentage points for R&D expenditure between 0% to 2% R&D intensity;
- 6.5 percentage points for R&D expenditure above 2% to 5% R&D intensity (i.e. not including R&D expenditure falling within the first 2 per cent of the claimant’s total expenses for the year);
- 9 percentage points for R&D expenditure above 5% to 10% R&D intensity (i.e. not including R&D expenditure falling within the first 5 per cent of the claimant’s total expenses for the year); and
- 12.5 percentage points for R&D expenditure above 10% R&D intensity (i.e. not including R&D expenditure falling within the first 10 per cent of the claimant’s total expenses for the year)
- the maximum amount of R&D expenditure eligible for concessional R&D tax offsets will be increased from $100 million to $150 million per annum.
For companies with aggregated annual turnover below $20 million:
- cash refunds from the refundable R&D tax offset will be capped at $4 million per annum. Amounts that are in excess of the cap will become a non-refundable tax offset and can be carried forward into future income years
- clinical trials will be excluded from the $4 million cap on cash refunds, to encourage development in this area
- the refundable R&D tax offset will be amended and will be the claimant’s tax rate for the year plus 13.5 percentage points.
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