Assessing attribution income 043-04050010

For most customers, assessment of income from private companies and trusts changed on 1 January 2002. See also Assessment of income from trusts and companies for the treatment of income from private companies and trusts.

The pre 1 January 2002 rules (which do not include attribution of income) only apply to the assessment of income from private companies and trusts for:

• all customers prior to 1 January 2002
• customers who are non-attributable stakeholders of private companies and trusts on or after 1 January 2002, and
• customers who receive income from private companies and trusts that do not meet the definition of 'designated' or 'controlled' private companies and trusts

Dividends and distributions received from private companies and trusts are included in the customer's income. The gross amount of the dividend payment, including any imputation credit, is the amount to be assessed as income.

The assessed income includes the actual amount of any individual payments, and any imputation (or franking) credits attached to them.

Explanation: Franking credits are also known as imputation credits.

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.

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.

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.

A company is a taxpayer in its own right. This means any dividend received 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. The credits will not appear in the profit and loss statements of the company because they may be offset against any tax payable by the company. Therefore, any imputation credits attached to dividends received by a company have to be added to the accounting profit of the company.

A trust does not pay tax in its own right, but can be assessed separately on income it does not distribute. The tax return of a trust will include the imputation credits attached to dividends received even though it may not appear in the trust profit and loss statement. This is because the credits are usually distributed to the beneficiaries who can take advantage of the imputation credits.

As such, imputation credits need to be added to any dividends paid to shareholders by a company, but are normally already included in any distribution paid to beneficiaries by a trust.

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 will 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 = $1000
• however 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 $1000 is declared as a distribution and a $300 imputation credit, then the income to be assessed is $1000

For a controlled private company/trust, the income may include amounts from other public companies and trusts and Centrelink should include the imputation credits in the income of the entity as outlined above for the controllers.

For non-controllers assessed only on distribution income or controllers who receive income greater than their attributed amount:

• for a private company dividend, the imputation credit has to be added on to the dividend
• for a private trust, the assessable distribution income needs to include any imputation credit distributed to the non-controller

For a private trust, the assessable distribution income needs to include any imputation credit distributed to the non-controller. Note: care should be taken because it is possible the client received more than their share because they received a payment from prior year profits.

Under the foreign tax credit system, income derived by an Australian entity outside 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 offset tax paid and is therefore not income of a trust or a company.

Cash flow boost payments paid by the Australian Taxation Office to eligible small and medium sized businesses as part of the Australian Government COVID-19 stimulus response are exempt from assessment under section 8(8)(zt) of the Social Security Act 1991, and should not be included when assessing business income for a customer or their partner. Payments will be made for the March to June 2020 and June to September 2020 quarters.

If these payments appear as income on the profit and loss statement for an entity, they will need to be removed and disregarded in assessing the net income.