The small and medium business company tax rate continues to fall. Those businesses with an aggregated turnover of less than $50m have already seen their rate fall 30% to 27.5% for some years now, with a further drop occurring for the 2021 income tax return reducing the company tax rate further to 26%. What some taxpayer’s fail to clearly understand is the inter-relationship between falling tax rates, which are a benefit at a company tax level, and individual recipients of franking credits. As the rate of company tax falls, the franking credits attached to a “fully franked” dividend falls, and this has an effect on the balance of tax that an individual taxpayer recipient must pay. The latter is often referred to as ‘top-up tax’. The net effect is as follows:
When in receipt of a Fully Franked dividend at the large company rate of 30%, an individual without any other source of taxable income (such as a retiree) can receive up to $97,245 in cash dividends without paying any additional tax. This is due to the franking credits being sufficient to absorb 100% of the tax cost. When a lower franking rate applies, the cash amount of such a ‘Tax-free dividend’ also falls along with it. During the period of 27.5% tax rates for small businesses, the relevant dividend amount was $81,414 in cash to ensure no additional tax is payable.
Once the small business franked dividend rate falls to 26%, the ‘fully franked dividend’ amounts to only a $75,308 cash component in order for the fully franked dividend to remain effectively tax-free in the hands of the individual taxpayer.
So while it can be seen that the Government is assisting small businesses by reducing the tax rate and enabling those business to retain more profit for expansion, this does not extend to shareholders. As the company tax rates continue to drop, the amount of cash available for extraction in this tax-free way falls alongside it.
Should you require any further information or clarity in relation to the above points please contact our office and speak to either Noe, Oggy, Hayden, Michelle or Lucinda.
Date of Issue: 6 July 2020 Author: Noé Vicca
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