Assessment of income from trusts and companies 043-04050000

Item

Description

1

Imputation credits for companies

A company is a taxpayer in its own right. This means that any dividend which it receives from its investments - both from shares in other companies and from managed investments - may have imputation credits attached to them. These imputation credits are income in the 'hands' of the company, but will not show up in the profit and loss statements of the company because they may be offset against any tax payable by the company. Therefore, the imputation credits attached to dividends received by a company have to be added to the accounting profit of the company. The basic rules of imputation are:

• for a company (private or public) the amount of franked dividend declared does not include the imputation credit and the two need to be added together

For example, if $700 franked dividend is declared as income, and a $300 imputation credit, then the income to be assessed is $700 + $300 = $1,000.

For a controlled private company the income may include amounts from other public companies and CAOs should include in the income of the entity the imputation credits as outlined above for the controllers (that is, add them on for companies).

For non-controllers assessed only on distribution income or controllers who receive income greater than their attributed amount then for a private company dividend the imputation credit will have to be added on to the dividend.

Note: be careful here because it's possible the client received more than their share because they received a payment from prior year profits.

2

Imputation credits for trusts

A trust does not pay tax in its own right, but can be assessed separately on income which it does not distribute. This means that the profit and loss statement of a trust will include the imputation credits attached to dividends which it receives because, usually, they are distributed to the beneficiaries and the beneficiaries are the ones who take advantage of the imputation credits. The basic rules of imputation are:

• for a trust (private and managed fund) the distribution amount on the trust's tax return and the client's tax return are already grossed up to include the imputation credit, that is the imputation credit is already included in the distribution amount declared

For example, if $1,000 is declared as a distribution and a $300 imputation credit, then the income to be assessed is $1,000.

For a controlled private trust the income may include amounts from other public trusts and CAOs should include in the income of the entity the imputation credits as outlined above for the controllers (that is, don't add them for trusts).

For non-controllers assessed only on distribution income or controllers who receive income greater than their attributed amount then for a private trust the distribution will already include the imputation credit.

Note: be careful here because it's possible the client received more than their share because they received a payment from prior year profits.

Tax Ruling 2012/D1

As a result of this Tax Ruling, the trust tax returns from the 2011/2012 financial year may no longer include imputation credits under Division 6E of the Taxation Assessment Act in the income of the Trust Estate field of the return.

The ATO Trust Income Tax Return Instructions state that franking credits are included in the field: Franked distributions from trusts.

This means that if the trust income is being assessed based on Income of the ‘Trust Estate’ the CAO may need to add the franking credits back into the income, depending on the terms of the Trust Deed.

However, if the income is being assessed based on ‘Total net income or loss’ which includes ‘Franked distributions from trusts’, the CAO will not need to add the franking credits back into the trust income.

3

Foreign tax income

Under the foreign tax credit system, income derived by an Australian entity out of Australia is assessable, but a 'direct' credit is allowable for foreign tax paid on foreign income up to the amount of the Australian tax payable in respect of that income, that is, excess tax paid is not refundable but can be used to offset tax paid and as such is therefore not income of a trust or a company.

4

Imputation credits pre 1 July 2000

Prior to 1 July 2000, a taxpayer obtained a tax rebate equal to the amount of imputation credits received. The rebate reduced income tax payable, but once tax payable was reduced to zero, no benefit was obtained from further excess credits and was lost.

5

Imputation credits post 2000-01 financial year

From the 2000-01 financial year, a person without a tax liability can lodge an 'Application for Refund of Imputation Credits for Individuals' with the Australian Taxation Office (ATO) and receive a payment from the ATO equal to the amount of imputation credits. A person with a tax liability will continue to lodge an income tax return to obtain a rebate to reduce income tax payable.

6

Imputation credits post 1 July 2001

From 1 July 2001, a person without a tax liability may receive the gross amount of the dividend from the source of the dividend, that is, eligible taxpayers will be able to receive early refunds of excess imputation credits.

7

Assessment of income from trusts and companies post 1 January 2002

For many customers assessment of income from private companies and trusts changed from 1 January 2002. For customers who are affected by the new rules, please see Guide to Social Security Law, 4.12.7, Assessing Income & Distributions of Controlled Private Trusts & Controlled Private Companies in References for the treatment of income from private companies and trusts.