Question

BlueSkye Pty Ltd (BS) was incorporated on 12 August 1990 by its two shareholders, Basil and Joan Skye. Basil and Joan still own the two $1 shares in BS, and they have no intention of selling their shares. Basil and Joan are the only two directors, but they also rely on advice from Brenda (see below) quite a lot. On 23 September 2019, BS made its annual dividend distribution to Basil and Joan. Each shareholder received $50,000.

Advise BS on the income tax implications of the above. Fully explain your advice by reference to Australian tax legislation, tax cases and tax principles

Answer 1

Taxation on Dividends :

Tax treatment whether you hold shares in Pvt company or publicly listed company are same.

Dividends are paid out of profits which have already been subject to Australian company tax which is currently 30% (27.5% for small companies).Recognising that it would be unfair if shareholders were taxed again on same profits, share holders receive a rebate for the tax paid by the company on profits distributed as dividends.

These dividends are described as being franked. Franked dividends have a franking credit attached to them which represents the amount of tax the comapny ahve already paid.franking credits are also known as imputation credits.

The share holders who receive a dividend is entitled to receive to receive a credit for any tax the company has paid, if the shareholders top tax rate is 30% or 27.5% where the paying company is a small, the ATO will refund the difference.

In the present case BS has only two share holders and directors of the company and received a dividend of 50000$ each and the company is not required to pay any tax on such dividend distribution as this dividend is paid out of profits after tax.and the share holders are also eligible for 30% imputation tax credit .

In these case imputation credit is = 50000$÷70%= 71428$

Imputation tax credit = 21428$.