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The 20 per cent bonus deductions reduce the tax liability for a small business but can mean dividends arrive less than fully franked, tax specialist says.
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Tech, skills boosts contain sting in tail for shareholders
03 October 2023
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The bonus 20 per cent deductions for technology or skills spending can have a sting in the tail when the business pays dividends, said one tax specialist, and shareholders end up footing the bill.
Knowledge Shop tax director Michael Carruthers said the boost had the effect of reducing a company’s tax bill in the short term, which was generally a good thing.
But it also meant the company was generating fewer franking credits to pass on to shareholders when it distributed those profits as a dividend.
“If the company is claiming some bonus deductions, less tax is being paid in the company but there are less franking credits being generated,” Mr Carruthers said. “Which means when you go to extract those profits from the company and pay them out to shareholders as a dividend, you don’t necessarily have enough franking credits to fully frank that dividend.
“So it can mean that the shareholders end up paying more tax than they would have when they receive that dividend.
“You get the benefit in the company in the short term but that might be offset down the track at the shareholder level.”
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He said where the relevant body claimed the boost was a trust, then there were two possible outcomes.
“If the definition of income in the trust deed is linked to section 95 of the ITAA net income for tax purposes, then the income available for distribution to beneficiaries is likely to be lower than it would be otherwise,” he said.
“If this means that the trust no longer has a positive amount of distributable income then this can cause flow-on implications (e.g. franking credits could become trapped in the trust).
“If the trust is a unit trust and it distributes an amount to a unitholder that exceeds the amount that is included in the assessable income of the unitholder, then CGT event E4 will normally be triggered.
“If so, the unitholder would need to reduce the cost base of their units. If the reduction amount exceeds the existing cost base of the units then an immediate capital gain could arise.”
The technology and skills boosts were introduced in the final budget of the previous federal government as incentives for small business to invest in digital equipment and training. They allow businesses with less than $50 million turnover to claim an additonal 20 per cent as a tax deduction when they spend on eligible technology or training.
Mr Carruthers said the “sting in the tail” was a perennial issue when a government provided an incentive to taxpayers, particularly for companies and unit trusts. A similar dilemma was likely to arise in connection with the small-business energy incentive, which aimed to incentivise electrification.
“It comes down to the fact that the company or the unit trust can often take advantage of that in the short term, but there can be an unexpected tax consequence later down the track,” Mr Carruthers said.
However, he said changes in the corporate tax rate and maximum franking rate rules over recent years could advantage some companies.
“A lot of people are realising that they’ve now got companies that have paid tax at higher rates in the past – 30 per cent – but at the moment, they’re only allowed to pay a 25 per cent franking rate,” Mr Carruthers said.
“So there are companies that have some spare or surplus franking credits and it can sometimes be a bit difficult to know what to do with those. This is one way that they might be useful – you can potentially use those franking credits to basically overcome this problem.”
Mr Carruthers said the actual result in each case would depend on the franking account balance and the profits available to pay out to shareholders.
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