Topic 6 Company and Partnership
 
Why:

1. Tax loss

Company can only claim tax losses in the past against future taxable income if meet 1 of 2 test.

2. Payment to relative

Payment to relatives by company s109,
Relative: Assessable income, 1) salary what is reasonable when the person receive. 2)Plus unformed dividend.

3. Loans

Loans from company to directors and shareholders. Div 7A
Any Loan by a company to director and shareholders must be repaid (Principle and interest) within 7 years; you have that time to pay loan and interest. If you don’t repaid, it will be your assessable income to the director or shareholders.
 
Continuity of ownership test
More than 50% here and more than 50% there.
If more than 50%, then claim the loss.
If don’t meet the tax, which is continuity of ownership test, then must need some business test.
Selling chicken or Pizza, they are different.
 
Reconciliation
Between accounting income and taxable income.

1. Start with the accounting profit.
2. Some operating expense for accounting purposes will also be deductible for tax purposes. Such as wages, rent and telephones, which they are deductible for accounting and tax under s8-1.
3. What is not deductible for tax purpose (expense),
4.  

-Accounting depreciation
-Add back to accounting profit.

4. What should be include in taxable income but not included for accounting purposes.

-Imputation credits
-Foreign tax offset

5. What is allowable for tax as an allowable deduction?

-Tax depreciation.
       -Specific deductions. S25
       -Deduction to get to taxable income.

6. What should not be included in assessable income?

-Gain on before 20/9/85 asset sold.
-Unrealized gains on sell.
 
Dividends: Paid by Australian companies and out of after tax profits, as well as now system from 1/7/86 called dividend tmp system.
Purpose: Avoid double taxing of company profits, which in company and shareholders hands. There is only applies to dividend paid by Australian company to Australian resident shareholders. Once included as assessable income by the shareholders, then claims a credit for the tax paid against his tax liability. Any excess imputation credits are refunded to taxpayer.
 
How does it work?
·        Old system:
Company taxable income: Tax 34% A.T.D. to pay to shareholders.
Shareholders: Cash Dividend Taxable 60%.
·        New system:
Company: Taxable income stays same as old system, just change tax rate as 30%.
Shareholders: Cash Dividend and imputation credits (tax paid by company). Tax payable: 47%.
·        Formula: Cash Dividend*(Tax Rate/1-Tax Rate)*100%
·        Whole system is driven by tax paid by the company.
·        Company need to keep a dividend imputation account.

	Dr	Cr	Bal
1/7/14	Paid #2	10,000	10,000
28/7/14	#2	12,000	22,000
20/10/14	#	300	22,300
25/2/15	#	13,000	34,300
25/3/15	8,000		26,300
28/4/15		12,000	38,300
28/6/15	20,000*(30/70)		29,729
30/6/15		Credits at 29,729

 
Imputation Legislation s207-5(1)
 
 

 
Partnership
·        S995
·        Group coming together to run a business.
·        Receive income jointly.
·        Why: Split income and lower tax rate.
·        Proof:
-Partnership agreement between people.

•  

-Bank account

•  

-Owns asset.
·        Calculate net partnership income: taxable income.
-Partnership dies not pay tax, all you do is calculate ne partnership income of partners who pay tax own their shares.
-If partnership makes a loss, you distribute it to the partners as well.
·        Treatment and income items
Sales, fees, service s6-5
-Interest income, dividend,import rent, capital gain, and exempt income.
-Operating expense rent, wages, phone.
-Salary to partners. This is not deductible, because as a partner in a partnership you cannot employ yourself.
- Interest on loans, you can borrow for a bank, interest on loans from partnership, you can lend your money, and it could be deductible to you partnership.
- When you create partnership, you need distrusted all you capital. Capital is your investment, not deductible.
- out of your money, it is not deductible for your partnership.
-Superannuation is not, but in personal tax return.