A Practical Introduction To Australian Taxation Pages 301 To 325

Less: LMITO 255.
00
Less - Low income tax offset 445.00
Less – Small business tax offset * 28.76
Net tax payable 140.24
* $10,000 / $22,500 = 44%

$817.00 x 44% = $359.48
$359.48 x 8% = $28.76
Zorro is presently entitled and is not under a legal disability. He is assessed under s.97
at ordinary rates.
Trust distribution 10,000

Taxable income 10,000 Tax 0.00
LMITO 255.00
Low income tax offset 445.00
Net tax payable 0.00
* $10,000 / $10,000 = 100%

$0.00 x 100% = $0
$0 x 8% = $0
Trustee assessed under s.99A as this is an inter-vivos trust:

Division 6E net income 77,000
Distributions to beneficiaries
Scoot 10,000
Monty 20,000
Chloe 10,000
Zorro 10,000
Total distributed to beneficiaries 50,000
Income not distributed to beneficiaries 27,000 Tax @ 45% 12,150.00
Note: the trustee does not receive the low income tax offset or the small business tax
offset.
Copyright © 2019. Thomson Reuters. All rights reserved.
Readings
PRINCIPLES OF TAXATION LAW [20.180]
Trusts and Fringe Benefits Fringe benefits provided by the trust to employees
will be fully deductible to the trust and will be taxed under the Fringe Benefits
legislation. Please refer back to Topic 2 for a more detailed discussion on this issue
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Annette, Morgan, et al. A Practical Introduction to Australian Taxation Law, Thomson Reuters, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6023084.
Created from curtin on 2020-07-07 03:33:20.
If you are feeling like the picture, just take a deep breath and take it one step at a time,
there are a few steps to understanding trusts, so don’t over complicate it. Just ......
1) Work out the trust income

2) Exclude the specified income
3) Distribute to the beneficiaries
4) Work out the tax of the beneficiaries or trustee if a minor
5) Any income left over the trustee pays tax on it.
Now that you have completed this topic, you should be able to
calculate:
• the tax payable by a minor

• the net income of a trust
• how that income will be distributed
• tax payable by the trustee of the trust; and,
• the tax payable by a beneficiary of a trust.
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TRUST NET INCOME
Is
beneficiary
presently
entitled?
Yes No
Is Inter-vivos Deceased
beneficiary Trust? Estate?
under legal
disability?
Entitled?
Yes No
Is Estate
Beneficiary assessed Trustee assessed < 3 years
at ordinary rates (s.97) at 45% (s.99A) old?
Does
Div 6AA
apply?
Yes No
Y N
e o
Div 6AA applies Trustee assessed and Trustee assessed at Trustee assessed at modified
Trustee assessed taxed at ordinary rates ordinary rates (s.99) rates (s.99)
(s.98) (s.98)
Does
Beneficiary
have
other income
Yes No
Beneficiary lodges own

return (s.100(1) and gets Beneficiary does not
a credit for tax paid by need to lodge own return
the Trustee (s.100) (2)
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TOPIC SIX QUESTIONS –
MINORS AND TRUSTS
1. Which of the following beneficiaries are presently entitled to income?
(a) The trust deed specifies that the beneficiary is to receive 25% of the net
income of the trust;
(b) The trustee exercises its discretion and distributes 25% to a beneficiary;
(c) The trust deed specifies that 30% of the net income is to be accumulated
for the beneficiary until the beneficiary turns 21 years of age. If the
beneficiary dies before turning 21, the accumulated income is to be split
between the remaining beneficiaries. The beneficiary is presently 12 years
old;
(d) The trust deed specifies that 30% of the net income is to be accumulated
beneficiary dies before turning 21, the accumulated income is to be split
between the remaining beneficiaries. The net income of the trust is
$200,000. The trustee spends $35,000 paying for the beneficiary’s school
fees and a new car. The beneficiary is 17 years old;
(e) The trust deed specifies that 30% of the net income is to be accumulated
beneficiary dies before turning 21, the accumulated income is to be paid to
the beneficiary’s estate.
2. Of the following, who is not a “prescribed person” for the purposes of

Division 6AA of Part III of the Income Tax Assessment Act?
(a) A 15-year old disabled person who has been certified to be such by a doctor.
(b) A person who turned 18 on 28 June CY.
(c) An 18-year old who was retrenched on 1 May of the current income year and
remained unemployed for the whole of May and June.
(d) A 17-year old student whose only income is from a legacy invested to
produce such income.
(e) A 17-year old who left school on 21 December of the current income year
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and worked as a sales assistant until commencing a university course on 7
March of the current income year.
(f) A 17-year old who commenced full-time employment on 21 December of the

current income year, was retrenched on 1 June and was still unemployed on
30 June.
3. Which of the following income is excepted assessable income and which is

eligible assessable income. Students must show which section applies to
each item. You are to assume that the income is received by a prescribed
person.
(a) Interest of $6,000 received from $100,000 left to the minor on the death of a
great aunt;
(b) A salary of $8,000 earned by the minor from a part-time job;
(c) Rent of $25,000. The minor bought the property from damages received as
a result of a car accident;
(d) Dividends of $12,000. The shares were bought by the minor’s grandparents
when the minor achieved high grades at the end of Year 9.
(e) Dividends of $15,000. The shares were bought for the minor with monies
which were paid to the minor from the superannuation fund of a deceased
grandparent.
4. Thim Peng was 17 years old and completed school on 8 December of the current
income year. She commenced full time work the following week and derived salary
of $12,000 until June. She had no income while studying.
As she had done so well at school her grandfather deposited $5,000 into a bank
account in her name which earned her interest of $225 in the current income year.
Her father transferred dividend-producing shares to her so that he could use her
lower tax rate. The dividends totalled $12,000 and had franking credits of $5,143
attached.
(a) Calculate Thim Peng’s taxable income and net tax payable including
Medicare levy.
(b) Recalculate your answer assuming Thim Peng did not enter full time
employment but continued on to university. The salary of $12,000 was
derived from part-time work.
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5. The Green’n’Gold Family Trust was created upon the death of Mr Green’n’Gold.
Under the terms of the deed losses are to be met out of corpus. The beneficiaries
of the Trust, who are presently entitled, are:
(a) Marlena Green who is entitled to 50% income as well as corpus
(b) Steven Gold who is entitled only to 50% income.
Marlena is 19 and Steven is 21.
In the previous year the Trust suffered a tax loss of $5,000. In the current income
year the Trust derived income of $20,000.
Required:
(i) Calculate the net income of the Trust for the current income year, and
describe how the net income of the Trust will be assessed.
(ii) Assuming the Trust income of $20,000 included $3,000 exempt income,
review (i) above.
6. A. Brown, derived income from three sources, namely:
(a) Trading on own account.
(b) As a partner in a trading business.
(c) As a life tenant of the whole of the income of his late mother’s estate to
which he is presently entitled. Any losses are to be met from corpus.
During the under mentioned years the following particulars are furnished to you.
Year ended June 30 Yr 1 Yr 2 (PY) Yr 3 (CY)

Trading profit on own account 14,000 8,000

Trading loss on own account 6,000
Brown’s share partnership loss 6,000
Brown’s share partnership income 4,400 4,200
Net loss of Trust Estate 4,200
Net income of Trust Estate 3,600 2,700
Self Employed Superannuation Contributions 400 600 800
Calculate Brown’s taxable income for each of the three years. Show
workings and give reasons for your answer.
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7. H.E. Nomore was a chartered accountant who rendered his income tax returns
on a cash basis which was acceptable to the Commissioner of Taxation. Nomore
died on 30 March of the current income year and administration was completed
on 15 May of the current income year.
The will provided that one half of the net income of the estate be paid to the
widow, with the balance being accumulated for the benefit of the two children of
the deceased until each reaches the age of 18 years; thereafter each child is to
be entitled to his or her share of the income provided that income may be applied
by the trustee for the benefit of a child under 18. Should a child die, the
accumulated funds are paid to charity.
In the current income year, the executors of the estate received the following:
Owing at date of death $
Professional fees owing at date of death 20,500

Payment for marking TEE Accounting papers 302
Accrued since date of death
Interest from debentures 300

Net rent 900
Interest from bank 5,400
During the year the Trustee:
(i) paid the widow her share of the net income.
(ii) paid to the widow amounts totalling $500 to assist with the schooling and
other expenses relating to the education of Junior, Nomore’s 14-year-old
son.
(iii) did not make any payments to Mollie, Nomore’s daughter, who is 12 years
old.
Explain how the income will be assessed.
8. The Chan Family Trust commenced during the 1996 year when it was settled by a
family friend. In the current income year the trust income was as follows:
Net Trading Income 40,000

Unfranked Dividends 20,000
Interest 30,000
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The trust deed required the trustee to distribute $40,000 to the eldest daughter,
Yim Seong, who was 25 years old and had no income other than the trust
distribution.
Of the remaining income after the payment to Yim Seong, 50% was to be
accumulated for the eldest son Yau Shin until he reached 21 years of age. The
trustee has discretion to pay for his education out of his share. He was 15 years
old at present. In the event he dies before he turned 21 his share would be donated
to a charity. He earned $8,000 from a job during his school holidays.
Of the remaining income after the payment to Yim Seong, 30% was to be
accumulated for another daughter Yim Cheok (14) until she turned 21. Her share
was to be distributed to the other beneficiaries if she died before turning 21.
Of the remaining income after the payment to Yim Seong, 10% was to be paid each
year to the 12-year old orphaned cousin of the family. The cousin qualified for a
double orphan’s pension but for s.1003 of the Social Security Act 1991.
The remaining income was to be distributed at the discretion of the trustee. $12,000
was paid by the trustee as school fees for Yau Shin and the remaining income was
retained by the trustee.
Required:
(a) Calculate the net income of the trust and the tax payable including
Medicare Levy by the trustee and for each beneficiary assuming the
trust is an SBE.
(b) Recalculate the above if the trust was not an inter-vivos trust but a
deceased estate which commenced in the current income year.
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9. The net income of a trust estate for the current income year consists of:
$
Unfranked dividends 54,000
Interest from company debentures 8,000
Rent from property 20,000

82,000
The trust was established upon the death of Thomas Doubt who died 5 years ago
and provides for distribution as follows:
 One quarter to his widow May Doubt.
 One quarter to his son John, aged 16, absolutely.
 One quarter to each of his daughters, Barbara and Helen, aged 10 and 12, to
be accumulated until both of them have reached the age of 18 years; if either
or both of them dies before reaching 18, their shares will be paid to the widow.
Required
Calculate the tax payable including Medicare levy by the beneficiaries and/or
the trustee, given that the beneficiaries have no other income.
10. The Watson Family Trust which was settled by a family friend had the following
income:
$
Trading Income 78,000
Interest 15,000
Dividends 6,000
Franking credits attached to these dividends are $772.
The dividends and franking credits as well as 50% of the trust income
is distributed to Moira. She is 17 years old.
In addition to the trust distribution she receives net rent of $10,000 from a property
left to her in her aunt’s will. She is currently a full-time student.
25% of the trust income is distributed to Peter who is 12 years old. Peter also
receives $1,200 interest from a bank account started by his mother.
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The remaining income was to be distributed at the discretion of the trustee. The
trustee paid university fees and living expenses of $15,000 for George who was 20
years old and a beneficiary of the trust. He had no other income.
Required
Calculate the net income of the trust and the tax payable including Medicare
levy by the beneficiaries and/or the trustee assuming the trust is a SBE.
11. The Quack Family Trust was created by Mickey Quack, who has absolute
discretion relating to the distribution of Trust income.
During the current income year the Trust had the following:
$
Income Trading Gross Profit 30,000
Dividend franked to 100% 5,100
Franking credits attached to
the dividend are $2,186
Expenses General (all allowable) 21,000
Depreciation at tax rates 941
The beneficiaries of the Trust are:
Minnie, Mickey’s de facto spouse

Daisy, Minnie’s daughter by a previous spouse – under 18 years of age
Debbie, Daisy’s twin sister – under 18 years of age
Sonny, Mickey’s nephew– under 18 years of age.
During the year Mickey decided only Sonny would get a Trust distribution, and
intended to make him specifically entitled to all the dividend income. The rest of
the Trust income would be invested in other income producing investments. The
distribution was made on 29 June of the current income year.
Required:
Explain how the Trust income will be assessed assuming Sonny was 17
years old.
12. The Stower Family Trust has the following income and expenses:
Capital gain – before general discount 50,000

Capital gain – before general and active asset reductions 62,000
Lease premium 10,000
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Net Trading income (i.e. after expenses) 130,000
Dividend with franking credits of $3,600 attached 18,000
The income was distributed as follows:
Beneficiary 1 who was 51 years old was made specifically entitled to the capital
gain. This beneficiary had also sold an asset at a capital loss of $75,000 and had
income from other sources of $68,000.
Beneficiary 2 who was 17 years old was made specifically entitled to the dividend
income plus an additional $15,000. This beneficiary also received $20,000 interest
from income bequeathed to the child when a family member died some years ago.
All remaining income is retained within the trust.
Required:
Calculate the net income of the trust and the taxable income and net tax
payable including Medicare levy by the beneficiaries and/or trustee
assuming the trust is an SBE but you are not required to calculate any SBE
Tax Offsets.
13. This is a continuation of Question 11 from Topic 5
Holly and Jack (both 44 years old) are 2 of the beneficiaries in their family trust
which operates a business selling shoes. They have 2 children, Brett and Fiona,
both 16 years old.
Income
Sale of shoes 380,000

Dividends – with attached credits of $2,143 5,000
Capital gain on sale of goodwill of former champagne business
Sale price $100,000, cost price $30,000 – general and
active discounts apply 17,500
Sale of shares – after general discount applied
45,000
Expenses
Purchase of shoes 125,000

Motor vehicle expenses for Jack – 80% work-related 15,000
Salaries – staff (this includes $10,000 to their nephew,
Oscar who works part-time and is actually paid $3,000
more than a non-family member who works the same
hours) 40,000
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Salary – Holly 65,000
Salary – Jack 30,000
Superannuation for both Jack and Holly, paid equally 50,000
Telephone expenses for salesman – 85% work-related,
15% private 2,800
The trust made a loss of $20,000 in the previous year. It was not to be met from
corpus.
Notes:
Holly – in addition to her salary she was made specifically entitled to the net capital
gain of the trust. She had a capital loss from the sale of assets last year of $95,000.
Jack – in addition to his salary he was made specifically entitled to the dividends
from the trust.
Fiona received $10,000 from the trust. She also worked full-time and had a salary
of $15,000.
Brett also received a dividend of $10,000 with franking credits of $2,400 attached.
The shares had been left to him in the estate of his late grandfather and have been
transferred into Brett’s name.
Any remaining income was to be accumulated for Brett until he turned 21 years of
age. If he were to die before turning 21 then his accumulated funds would be given
to Fiona. The trustee could however, pay for specified expenses, and in the current
year bought Brett a new car for $11,000.
Required
Calculate the net income of the trust and the taxable income and net tax
payable including Medicare levy by the beneficiaries and/or the trustee
assuming the trust is an SBE taxpayer.
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TOPIC SEVEN - COMPANIES
A company is a separate legal entity to the shareholders with an interest in that
company. There are a number of provisions of the Income Tax Assessment Act that
apply specifically to companies.
Objectives
When you have completed this topic, you should be able to:
• explain the effect of a payment from a private company that is deemed to be a

dividend;
• understand the operation of the bad debt and loss provisions in relation to a private
company;
• calculate the net tax payable by a company, and
• understand the operation of the dividend franking system.

Companies are separate legal entities but require natural persons known as
directors to act on their behalf.
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Guide to the sections to be studied in this topic:
Income Tax Income Tax
Assessment Act Assessment Act
1936 1997
6(1) Definition of company, dividend, paid 995-1
and resident
6(1) Distribution out of share premium
account
6(1) Payment applied to capital
44 Dividends included in assessable

income
Deductibility of bad debts 165-117, 150 & 210
Deductibility of losses carried forward 165-5, 10, 12, 13,
166-5, 145, 150
103A Private companies
109 Excessive payments to shareholders,

directors and associates deemed to
be dividends
Division 7A Dividends to entities
s.109B – 109ZD
Shares, resolutions and residency 205-25
Surplus or deficit definitions 205-40
Franking credits 205-15
Franking debits 205-30
What constitutes franking 202-5

Dividend statement 202-75, 202-80
Consequences of breaching the 203-50

benchmark rule
Franked dividends paid to 207-35(2), 207-55
partnership
Franked dividends paid to trusts 207-35(3)
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Income Tax Rates
Act
23 Company tax rate
23AA Base rate entity
Tax Administration
Act
Division 45 PAYG (Instalments) - payment of
company tax
•Responsible for the decision making and running of the

Directors company
•Private (Pty Ltd) or Public (Ltd)

•Can conduct a business - Trading Company
Company •Hold Investments - Investment Company
•Taxed at 30% on profits
•Taxed at 27.5% on profits if BRE Taxpayers
•Individuals, Partnership, Trust or Companies

Shareholders •Entitled to retained profits (Dividends)
•Entitled to capital on winding up of company
312 | P a g e
Notes and Worked Examples
Definitions
You should note the definition of company in s.995-1. A private company is defined in
s.103A as a company that is not a public company. A public company is defined in
s.103A(2), and includes a subsidiary of a public company. You should read this
definition although you will generally not be required to determine the private/public
status of a company. If the company's name contains Pty Ltd, you should assume that
it is a private company; if it only contains Ltd, you should treat it as a public company.
Certain sections that you will be studying do not apply to public companies.
In this course we do not consider non-resident companies, superannuation funds, co-

operative companies, friendly societies; trade unions, life assurance companies or strata
title bodies corporate.
Self-assessment and Payment of Company Tax
A Base rate entity (BRE) is one which:
 Has annual turnover less than $25 million; and,

 Base rate passive income which is not more than 80% of the assessable income
of the company.
BREs are taxed at 27.5%.
Passive income is:
 Interest
 Rent
 Royalties
 Capital gains
Note: the comparison must be made with assessable income, not taxable income.
The company tax rate for the current year of income is a flat rate of 30% for non-BRE
companies. Companies are not liable for Medicare levy.
With the introduction of self-assessment for companies, a new system of payment

arrangements was introduced. A company is now required to make one or four
payments of tax, depending on its taxable income.
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A company with a most recent notional tax payable of less than $8,000 will lodge its
previous year’s company tax return on 21st October after the end of that year and pay
tax of that year in one instalment on that date. This amount will be provided to you.
Companies other than those detailed above will be required to pay 4 PAYG instalments
on 28 October, February, April and July. The amount of each instalment will be provided
to you in questions.
Instalments paid will be offset against the tax payable for the year.
Readings
AUSTRALIAN TAXATION LAW 2-130; 15-200
PRINCIPLES OF TAXATION LAW [3.210] [21.10] [24.160]
Example 7:1 Instalments of tax and company tax payable
For the year ended 30 June CY a company (which is not a BRE) has taxable income of
$200,000. Instalments were paid as follows:
28 July CY 4th instalment of PY tax 23,000

28 October CY 1st instalment of CY tax 15,000
28 February CY 2nd instalment of CY tax 12,000
28 April CY 3rd instalment of CY tax 9,000
28 July FY 4th instalment of CY tax 20,000
Calculate the net tax payable by the company.
Taxable payable at 30% - $200,000 x 30% 60,000

Less: PAYG (Instalments)
28 October 15,000
28 February 12,000
28 April 9,000
28 July 20,000 56,000
Net tax payable 4,000
The $23,000 paid on 28 July CY relates to the tax of the PY and would have been offset
against the tax payable of the PY.
Students should note that the 4th instalment will always be paid after the end of the
financial year. It will be taken into account in calculating the tax of that year but in the
Franking Account (see below) it will be a credit entry in the following year.
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If we recalculated based on the company now being a BRE the only difference would
be the tax rate.
Taxable payable - $200,000 x 27.5% 55,000

Less: PAYG (Instalments)
28 October 15,000
28 February 12,000
28 April 9,000
28 July 20,000 56,000
Refund Due (1,000)
Losses and bad debts
Bad debts and losses claimable by a company are subject to certain anti-avoidance
provisions (Division 165). In order for a loss or bad debt to be claimable in a year of
income, the company must pass one of three tests:
Continuity of ownership: more than 50% of the same shares in the

company must be owned by the same
shareholders in the year of the claim, the
year the loss or debt was incurred and all
intervening years;
Continuity of business if the above test is failed, the company must

be carrying on the same business in the year
of the claim as immediately before the
change in ownership. On 1 March 2019

legislation was passed that will supplement
the current same business test, for business
losses with a more flexible similar business
test. The new test will enable greater access
to past year losses when businesses enter
into new transactions for business activities
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The similar business test
The similar business test will allow businesses to access losses following a change in
ownership where its business, while not the same, is similar having regard to:
 the extent to which the assets that are used in its current business to generate
assessable income were also used in its former business to generate
assessable income
 the extent to which the activities and operations from which its current business
generated assessable income were also the activities and operations from
which its former business generated assessable income
 the identity of its current business and the identity of its former business
 the extent to which any changes to the former business resulted from the
development or commercialisation of assets, products, processes, services or
marketing or organisational methods of the former business.
As a test for accessing past year losses, the 'similar business test' will only be
available for losses made in income years starting on or after 1 July 2015.
The 'same business test' and the 'similar business test' will be collectively known as
the 'business continuity test'.
Students must give the correct reason for allowing carry forward losses or bad
debts.
Example 7.2: Losses

Houses Pty Ltd is a resident Australian company. It operated a business selling
houses in Western Australia until 1 July CY when it changed business activities
to running an art gallery. The shareholders and income/losses for the years
ended 30 June were as follows:
Shareholders Year 1 Year 2 PY CY

A 25
B 25 25 20
C 25 25
D 25 25 30 30
E 70
Assessable income $10,000 $5,000 $20,000 $80,000

Allowable deductions $25,000 $6,000 $10,000 $20,000
Net income or loss ($15,000) ($1,000) $10,000 $60,000
In what year/s can the losses be brought forward and offset?
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Answer:
$10,000 of the $15,000 loss incurred in the year ended 30 June Year 1 may be
offset in the year ended 30 June PY the same persons continued to own more
than 50% of the same shares in the company for the year ended 30 June Year
1, 30 June Year 2 and 30 June PY
The remaining $5,000 loss incurred in the year ended 30 June Year 1 and the
$1,000 loss incurred in the year ended 30 June Year 2 cannot be offset in the
year ended 30 June CY because the majority shareholder requirement is no
longer met (only D meets the same share test on 25 shares = 33.3%) and the
business of the company has changed from what it was before the change in
majority shareholders.
Readings
AUSTRALIAN TAXATION LAW 18-000 – 18-010
PRINCIPLES OF TAXATION LAW [21.230] [21.330-340]
Deemed Dividends
Section 109 applies to excessive remuneration paid by the company, and the effect of
deeming the payment to be a dividend is to deny a deduction to the company for the
amount that the Commissioner considers to be unreasonable.
A deemed dividend is assessable to the shareholder under s.44. Deemed dividends

are not within the definition of frankable dividend in s.202-40, and accordingly the
franking system does not apply.
Under Division 7A amounts of money paid, lent or forgiven by a private company to

associated persons will be treated as dividends unless they meet certain specified
exclusions. For the purposes of this course, it will be sufficient to realise that such a
loan has been made.
To avoid a loan to an associated person being deemed to be a dividend under this

Division, the following conditions must be met:
 attract interest at or above the benchmark interest rate;
 be subject to a written agreement; and,
 the term of the loan doesn’t exceed the maximum term.
Note that these dividends are not frankable.
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Readings
AUSTRALIAN TAXATION LAW 18-500 – 18-520
PRINCIPLES OF TAXATION LAW [21.110 – 21.130]
Capital gains tax and companies
Companies do not benefit from the General Discount – see s.115-10. A company which
meets the SBE requirements may qualify for the Active Asset reduction under s.152-10.
Example 7:3 Companies and capital gains
A company sells a vacant block of land for a gain of $20,000 and an asset used in the
business for a gain of $30,000. Both assets have been held for more than 12 months.
What is the net capital gain?
Vacant land (no discount as the general discount under

s.115-10 doesn’t apply to companies) 20,000
Business asset (active asset reduction only) - $30,000 x 50% 15,000
Net capital gain 35,000
How would your answer change if these gains had been made by a trust?
Companies and Fringe Benefits
Fringe benefits provided by the companies to employees will be fully deductible to the
company and will be taxed under the Fringe Benefits legislation. Please refer back to
Topic 2 for a more detailed discussion on this issue.
The Imputation System

The imputation system “imputes” the tax paid by a company to its shareholders.
The franking account is used to keep a record of company transactions that affect
income tax. It records the tax paid by a company and this tax is then attached to a
dividend (dividend) by way of franking credits. The franking credit is then available as
a credit against the tax payable by the taxpayer receiving the dividend.
Although the example below gives section numbers to assist with your learning, you are
not required to quote section numbers in a franking account.
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Example 7:4 Franking Account
Graf Pty Ltd’s calendar showed the following events.

$
28 July Payment of last instalment of PY tax 5,200
15 September Receipt of dividend 3,000
This dividend had credits of 1,286
30 September Payment of dividend 10,000
The dividend had credits attached of $3,793
28 October Payment of first instalment of CY tax 6,250
15 November Receipt of dividend 18,000
This dividend had credits attached of $7,714
28 February Payment of second instalment of CY tax 8,500
1 March Lodgment of PY tax return showing:
Gross primary tax 40,000
Payment of balance of PY tax 17,750
28 April Payment of third instalment of CY tax 9,125
28 July FY Payment of fourth instalment of CY tax 5,162
Prepare a franking account for Graf Pty Ltd for the year assuming the opening
balance for the current year was a surplus of $11,111. Graf Pty Ltd is a BRE.
Answer:
Date Section Item Debit Credit Balance
01.07 Opening balance 11,111
28.07 205-15 Item 1 Last instalment 5,200 16,311
15.09 205-15 Item 3 receipt of franked
dividend 1,286 17,597
30.09 205-30 Item 1 Payment of fully
franked dividend 3,793 13,804
28.10 205-15 Item 1 First instalment of
CY tax 6,250 20,054
15.11 205-15 Item 3 Receipt of
dividend 7,714 27,768
28.02 205-15 Item 1 Second instalment 8,500 36,268

01.03 205-15 Item 2 Payment of tax 17,750 54,018
28.04 205-15 Item 1 Third instalment 9,125 63,143
30.06 Closing balance 63,143
Note: the fourth instalment of CY tax will be a credit item in next year’s
Franking Account.
Note: you do not need to give section numbers in the exam. They are
provided here for information only.
319 | P a g e
Readings
AUSTRALIAN TAXATION LAW 18-330 – 18-340; 18-370; 18-380 - 18-385 (items 1, 2
and 3); 18-387
PRINCIPLES OF TAXATION LAW [21.160 – 21.190]
Franking a dividend
When a company makes a dividend to its shareholders, it franks that dividend i.e. it
imputes the tax paid by the company by allocating a franking credit to the dividend.
There is a maximum amount of franking credits which can be allocated to a dividend.

This is called the maximum franking credit and is calculated as follows:
Amount of the frankable dividend x 1

Applicable Corporate Tax Rate
What this does it ensures that the company can only attach as credits the tax paid by
the company on its profits. It cannot attach more tax credits than tax actually paid on
that income.
The Applicable Gross-up Rate is calculated according to the formula:
100% - Corporate Tax Rate

Corporate Tax Rate
For companies taxed at 30% this is 2.333333 and the dividend amount will be multiplied
by 0.42857.
For companies taxed at 27.5% this is 2.636363 and the dividend amount will be
multiplied by 0.37931.
For example, if a taxpayer received $1,000 the franking credits are:

$1,000 x .42857 = $428.57 (this needs to be rounded to $429). Students will not be
required to calculate the amount of franking credit at this stage.
If the company is classified as a Base Rate Entity (BRE) then the formula will be
Dividend amount x 0.37931 e.g. $1,000 x 0.37931 = $379.31
320 | P a g e
Example 7:5
Company Pty Ltd. has a profit of $100 on which it pays tax at 30% = $30. If it wishes to
pay the remaining $70 as a dividend, the maximum franking credit which can be
attached to the frankable dividend is $30. This dividend was made on 1 July CY.
Apply the formula above and you will reach this amount:
$70 x 0.42857 = $30.
The company can attach fewer than $30 credits to the dividend, but it cannot attach
more than $30.
Re-calculate this if Company Pty Ltd is a BRE.
Company Pty Ltd. has a profit of $100 on which it pays tax at 27.5% = $27.50. If it
wishes to pay the remaining $72.50 as a dividend, the maximum franking credit which
can be attached to the frankable dividend is $27.50. This dividend was made on 1 July
CY.
Apply the formula above and you will reach this amount:
$72.50 x 0.37931= $27.50.
The company can attach fewer than $27.50 credits to the dividend, but it cannot attach
more than $27.50.
Benchmark rule
This is a very simple rule which is designed to ensure that all dividends paid by a
company (except publicly listed companies) in a particular period, must be franked to

the same percentage. For private companies, this period is the whole income year.
The rate applied to the first dividend paid during the period, is the benchmark rate for
the remainder of the period.
321 | P a g e

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Less: LMITO 255.

* $10,000 / $22,500 = 44%

Trust distribution 10,000

* $10,000 / $10,000 = 100%

Trustee assessed under s.99A as this is an inter-vivos trust:

1) Work out the trust income

• the tax payable by a minor

• the net income of a trust

• how that income will be distributed

• tax payable by the trustee of the trust; and,

• the tax payable by a beneficiary of a trust.

Beneficiary lodges own

1. Which of the following beneficiaries are presently entitled to income?

2. Of the following, who is not a “prescribed person” for the purposes of

(b) A person who turned 18 on 28 June CY.

(f) A 17-year old who commenced full-time employment on 21 December of the

3. Which of the following income is excepted assessable income and which is

(b) A salary of $8,000 earned by the minor from a part-time job;

(a) Marlena Green who is entitled to 50% income as well as corpus

(b) Steven Gold who is entitled only to 50% income.

Marlena is 19 and Steven is 21.

6. A. Brown, derived income from three sources, namely:

(a) Trading on own account.

(b) As a partner in a trading business.

Year ended June 30 Yr 1 Yr 2 (PY) Yr 3 (CY)

Trading profit on own account 14,000 8,000

Owing at date of death $

Professional fees owing at date of death 20,500

Accrued since date of death

Interest from debentures 300

During the year the Trustee:

(i) paid the widow her share of the net income.

Explain how the income will be assessed.

Net Trading Income 40,000

Unfranked dividends 54,000

Interest from company debentures 8,000

Rent from property 20,000

 One quarter to his widow May Doubt.

 One quarter to his son John, aged 16, absolutely.

The beneficiaries of the Trust are:

Minnie, Mickey’s de facto spouse

Capital gain – before general discount 50,000

The income was distributed as follows:

All remaining income is retained within the trust.

13. This is a continuation of Question 11 from Topic 5

Sale of shoes 380,000

Purchase of shoes 125,000

• explain the effect of a payment from a private company that is deemed to be a

• calculate the net tax payable by a company, and

• understand the operation of the dividend franking system.

44 Dividends included in assessable

109 Excessive payments to shareholders,

Surplus or deficit definitions 205-40

Franking credits 205-15

Franking debits 205-30

What constitutes franking 202-5

Dividend statement 202-75, 202-80

Consequences of breaching the 203-50