MODULE 3

COMPANIES AND
SHAREHOLDERS
KEY CONTENT
THE TOP 10 POINTS (5 POINTS THIS WEEK
1. WHAT IS A COMPANY?
 -Section 995-1 ITAA97 defines “company” as:

A body corporate; or any other unincorporated association or body

of person

Does not include a partnership or a non-entity joint venture

-Separate legal entity

DEFINITION
-Companies may be public and private

Public companies are generally listed on the stock exchange: s

103A(2) ITAA36

A private company is not a public company: s 103A(1)

CLASSIFICATION OF COMPANIES – PUBLIC OR PRIVATE?

Section 103A(1) of the ITAA (1936) states that a private company is one that is not a public company in
relation to the year of income.

Section 103A(2) deems a company to be a public company if:

 its shares were listed on a stock exchange (anywhere in the world) on the last day of the income year;
 despite being listed, a company will not be a public company where there is concentration of ownership
20:75
 a subsidiary of a listed public company (Section 103A(4));
 it is a non-profit company; a mutual life assurance company; a friendly society; a registered organisation
or a statutory body or a company in a which a government body established for public purposes had a
controlling interest on the last day of the year of income.

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PUBLIC OFFICER

 Every company carrying on business or deriving property income in Australia must appoint a
public officer: s 252 ITAA36
 Public officer must be a resident, a natural person aged at least 18 years

 For income tax law, the public officer is responsible for:

 Documents served on them

 Answerable for all obligations imposed on the company

 The same penalties if the company defaults.

2.
HOW IS A COMPANY TAXED?
How is a Company Taxed – basic rules

◦ Taxable income = assessable income – deductions

◦ companies pay tax at a flat rate of 30% or 26% (2020-21 income tax year);
◦ companies do not receive a tax-free threshold;
◦ companies do not pay Medicare levy or the Medicare levy surcharge;
◦ companies do not get many of the rebates that individuals do;
◦ a company is subject to loss rules;
◦ a company must appoint a public officer;
◦ companies are not eligible for the CGT discount method; and
◦ companies have access to a wide range of CGT rollover relief provisions.

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COMPANY TAX RATES
2021-22 tax rates – Companies
Income category Rate (%)

Base rate entities 25

Otherwise 30

A base rate entity is a company that both:

1. has an aggregated turnover less than the aggregated turnover threshold – which is $50 million
2. 80% or less of their assessable income is base rate entity passive income – this replaces the
requirement to be carrying on a business
 ◦ For accounting purposes, a company’s net profit is
calculated as the difference between income and
expenses, calculated in accordance with the AASB
Calculation of Accounting Standards.

a Company’s ◦ For taxation purposes, a company’s taxable income is

determined by assessable income less deductions.
Taxable ◦ These figures may not always give the same amount.
Income There may be either:
◦ Permanent differences; or

◦ Timing differences.

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COMPANIES:
EXAMPLES 1
AND 2
EXAMPLE 1 – BASE RATE ENTITY

Coffee and Cake Pty Ltd is the owner of a small cafe. It is also the beneficiary of a trust which
owns the premises from which the cafe operates and the premises next door. Above the cafe,
there is a large studio space which the trust rents out to a very successful yoga school. Next door
is rented to a high end retail store. All rental income earned by the trust is distributed to Coffee
and Cake Pty Ltd.

In the 2021-22 income year, Coffee and Cake Pty Ltd has an aggregated turnover under the
$50 million aggregated turnover threshold. Its assessable income is $700,000, comprising:

 $500,000 of trading income from running the business

 $200,000 of gross rental income attributable to the trust distribution.

The rental income is base rate entity passive income. Because this income is only 28.6% of its
assessable income, Coffee and Cake Pty Ltd is a base rate entity for the 2021-22 income year
and the 25% company tax rate applies.

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  For the year ended 30 June, Green Acres Pty Ltd (Not a base rate entity) derived a taxable income
of $100,000, excluding the following transactions:


 Dividend received from UK company (net of $300 withholding tax) 1,700

EXAMPLE 2: 

Unfranked dividend from Minatour Pty Ltd (a resident Australian company)
Fully franked dividend received from AMP Ltd (plus $1,500 imputation credits)
10,000

TAXATION OF 3,500

COMPANIES  Assume that Green Acres Pty Ltd paid PAYG instalments during the income year to the ATO
totalling $28,000.

 Required:

 Calculate Green Acres Pty Ltd’s taxable income and tax payable for the year ended 30 June.

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 The taxable income (and tax payable) of Green Acres Pty Ltd for the year ended 30
June is shown below:

 $

 Taxable income before transactions 100,000

 Dividend received from UK company (net of $300 withholding tax)
1,700
 Withholding tax gross-up (Section 128D) 300
 Unfranked dividend from Minatour Pty Ltd, a resident Australian company
10,000
 Fully franked dividend received from AMP Ltd
3,500
 Gross-up of imputation credits 1,500

 Taxable Income $ 117,000

 Taxable Income $
117,000

 Tax payable @ 30% 35,100

 Less: foreign tax credit (300)
 Less: Imputation credit (1,500)
 Less: PAYG instalments paid (28,000)

 Tax Payable: $5 300

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 According to Section 6(1) of the ITAA (1936), a
company is considered to be a resident of Australia if
it is:

Residency of (a) incorporated in Australia;

Companies (b)not incorporated in Australia, but carries on
business in Australia and has its central
management and control in Australia; or
(c)not incorporated in Australia, but carries on
business in Australia and has its voting power
controlled by shareholders who are residents of
Australia.

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 Where a resident Australian company receives
foreign income it must include the gross amount
received in its assessable income.

The withholding tax rate in respect of foreign

Foreign dividends received is generally 15%, whilst the

withholding tax rate in respect of foreign interest
received is generally 10%.
Income Whilst an Australian company includes the gross
amount of foreign income in its assessable income
and pays Australian tax (@ 30% or 25%) on this
amount, it is entitled to a tax offset (or credit),
which is calculated as the lesser of the foreign tax
paid or the amount of the Australian tax payable @
30% or 25%.
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3.
DIVIDENDS
 Taxing provision in s 44 ITAA36 stipulates
that the assessable income of a resident
shareholder in a company includes:
(a) Dividends paid to the shareholder by
the company out of profits derived by it
from any source; and

TAXATION OF (b) All non-share dividends paid to the

shareholder by the company.

DIVIDENDS Meaning of ‘paid’

 “Paid” means credited or distributed: s 6(1).
 Dividend still paid if it is credited and
irrevocable: Brookton Co-operative Society
Ltd v FCT (1981).
SECTION 44 ITAA36: KEY ISSUES

What are
What is the
Who is a “dividends” and
When is it paid? meaning of
shareholder? “non-share
“profits”?
dividends”?
4.
HOW DO WE DEAL WITH COMPANY LOSSES?
COMPANY LOSSES

Assessable Difference is the

Deductions income and net amount of the
exempt income tax loss

Tax losses are generally carried

forward indefinitely to offset
future taxable income of the
taxpayer
• Issue of “loss trafficking” activities
A tax loss arises under s 36-10 through trading companies with tax
losses.
when: • Anti-avoidance provisions.
CARRY FORWARD REALISED LOSSES

Carried forward revenue losses cannot be deducted unless company satisfies either the:

 Continuity of ownership test (CoT); or

 Business continuity test (BCT): s 165-10 ITAA97.

Above tests also apply to a revenue loss in the current year: Subdiv 165-B.

Similar rules apply to net capital losses, current year net capital losses and bad debts: Subdivs 165-CA, 165-CB and 165-C.
Continuity of Ownership Test: s165:12
A company has to maintain the same majority owners during the “ownership test period”, that is, the same persons
holding:

1 2 3
Rights to more
More than 50% Rights to more
than 50% of the
of the voting than 50% of the
company’s
power in the company’s
capital
company dividends; and
distributions
OWNERSHIP TEST PERIODS
BUSINESS CONTINUITY TEST

Business continuity test (BCT): s 165-13

If company fails the continuity of ownership test, it must satisfy the

business continuity test (BCT) to deduct a tax loss. BCT satisfied
if company meets either:
Same business test (SaBT): s 165-210 ITAA97, or
Similar business test (SiBT): s 165-211 ITAA97.
CONTINUITY OF BUSINESS TEST: S 165-13
 A company satisfies this test if in the current income year:

• It carries on the same business as it carried on immediately before

1 the “test time”; and

• It does not derive any assessable income from a new kind of

business or a new kind of transaction that it did not carry on or
enter into before the “test time”: s 165-210; OR
2 • It carries on a similar business.

 “Test time”:
 In general, the time when the company fails the CoT.
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COMPANIES:
EXAMPLE 3
EXAMPLE 3: COMPANY LOSSES CONTINUITY OF OWNERSHIP
TEST

 A company is wholly owned by Mr Boxx and carries on a shoe retail business at a

loss for the past couple of years. On 1 July, this income year, Mr Boxx transferred
80% of the shares in the company to his son George, who managed to turn around the
company to a profitable position.

 The company fails COT on 1 July this income year. It cannot utilise the carried
forward losses to offset against the current year’s taxable income unless it satisfies the
same business test.

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EXAMPLE 3: COMPANY LOSSES SAME BUSINESS TEST

Mr Boxx’s company can utilise the carried forward losses only if it satisfies the SaBT. If the
company continues to run the shoe retail business in the current year and the only change was to
expand its business with an online shop having the same trade name, it would most likely satisfy
the SaBT.

However, if the company opened a new retail shop selling clothes, it would likely to have failed the
SaBT.

Would it pass the SiBT? (Consider the 4 factors)

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5.
WHEN CAN A CORPORATE GROUP CONSOLIDATE FOR TAX PURPOSES?
 CONSOLIDATION

 Consolidation of entities results in the whole group treated as a single entity

for income tax purposes.

Policy objectives of
consolidation

Company • Prevent double taxation

(Parent) of the same economic
gain
• Prevent duplication of
the same economic loss
Company Company • Reduce compliance costs
(Subsidiary) (Subsidiary) and improve business
efficiency
MEMBERSHIP REQUIREMENTS

Australian resident company

Head Subject to normal corporate tax rate
Company
Not a member of another consolidated
group

Subsidiary members can be a company,

partnership or trust
Subsidiary
Australian resident

“Wholly-owned subsidiary” of the head

company based on beneficial interest
CONSOLIDATIONS

Effect of consolidation

 Consolidation simplifies the taxation of wholly-owned groups and reduces compliance costs by:
 ignoring intragroup transactions for tax purposes;
 losses, franking credits and foreign tax credits are pooled;
o This is particularly advantageous for franking credits that have been trapped in a loss-making subsidiary
member that did not have sufficient retained profits to pay a dividend and be in a position to use
franking credits.
 aligning PAYG instalments with annual income tax obligations; and
 replacing multiple reporting requirements by only lodging one income tax return and making one PAYG
instalment for the entire group.
 PRE CONSOLIDATION LOSSES

Pre-consolidation losses:
• Pre-consolidation losses of a subsidiary can be
IMPLICATIONS OF transferred to the head company if modified CoT
CONSOLIDATION and BCT tests are satisfied at joining time: s 707-
120.
• Amount of losses is subject to the “available
fraction” rule:
• Available fraction”: ratio of the market value of the
subsidiary at the time of the loss transfer to the
market value of the group at that time: s 707-320.
Pre-consolidation losses Available Head co’s taxable income for
utilised by head co. fraction the year
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COMPANIES:
EXAMPLE 4
EXAMPLE 4: CONSOLIDATIONS

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  P can elect to form a consolidated group with S1, S2, S3, and
ANSWER: S5. S4, cannot join the consolidated group as it is a non-
resident company.

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CONSIDER THE SAME FACTS EXCEPT THAT P IS A NON-
RESIDENT COMPANY:

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