D.T - recovery of company taxes paid on dividends

[MaxwellSmart]

Hi all,
Pardon if this has been asked before. ....This is my first year as sole director of a corporate trustee.

At the moment, the trust I manage receives all of its income from fully franked share dividends.

I plan to rent an apartment in the trustee name and use dividend income to pay for rent and other furnishings.

Given that I will be using franked capital for expenses, how do I recover the company tax already paid on the money spent?

Many thanks

 

[D.T.]

DT = Discretionary Trust? I thought you were calling me specifically

Lets say some example figures of 100k worth of dividends a year with 30% franking:

Per year:
+143k in grossed up dividends (100K / 70%)
-53k in furnished apartment rental
+90k to distribute to the beneficiaries

Assume the whole 90k comes to you and wife, 45k each. You and wife both have no other incomes or expenses.

45k each attracts about 7k each in income tax payble in July... but you can then claim 15k franking credits (100k x 30% / 2) each, bringing you both down to nil tax payable.

I'm not an accountant by any means, so check with someone who is.

 

[Ed Barton]

45k each attracts about 7k each in income tax payble in July... but you can then claim 15k franking credits (100k x 30% / 2) each, bringing you both down to nil tax payable.

If franking credits exceed the tax payable by the individual they can get them refunded too.

 

[jrc]

Hi all,
Pardon if this has been asked before. ....This is my first year as sole director of a corporate trustee.

At the moment, the trust I manage receives all of its income from fully franked share dividends.

I plan to rent an apartment in the trustee name and use dividend income to pay for rent and other furnishings.

Given that I will be using franked capital for expenses, how do I recover the company tax already paid on the money spent?

Many thanks

Why rent the apartment in the name of the trustee? Get some advice first as otherwise the rent paid might be classified as undistributed income which would have substantial tax consequences. Under Australian law a trust is normally a conduit for receiving income and passing that income on.

How are you using franked capital? Isn't it franked income?

 

[Paul@PFI]

I'm a tad confused but I think I undertand. You have asked a single question involving two issues.

1. Franked income for the trust. The trust will prepare a return after 30 June and declare its income. The income is grossed-up for the franking. So each $100 of FF div means trust income is actually $142.86. The trust chooses to either distribute to beneficiaries. Trust minutes etc are required prior to 30 June to determine who beneficiaries are and what entitlement they have. the trust could also choose to pay tax in which case Commr assesses highest marg ax rate to trustee less franking credit of $42.86 per $100 received.

Assuming the benificiary route each beneficiary will include their share of trust income + franking credit. So if individuals MTR is highesr than 30% expect a shortfall. This may then mean PAYG instalmnets will be required.

Thus the individuals get the benefit of the tax credits NOT the trust. I often do returns and "tax equalise" meaning I calc the beneficiary tax position with and without trust income and credits. Trust pays / credits difference. That and trust resolutions etc mean trust tax affairs comply and are quite straight fwd under guidance.

2. The trust may not have a deductible for the rent paid. What is the use of the property ?? If used by any family or an associate of any family (extended) it may trigger a deemed distribution or be a assessable capital amount (ATO would argue both) and any other form of trust distribution is a sham. Beware - Double taxation could result and/or denied deductions.

If rents are all arms length etc then any net rent will add / reduce net trust income. If its a loss Trust AND each beneficiary may need to assess its eligibility for refundable franking credits. Its NOT automatic. Also watch for the 45 day holding rule or it can taint franking credits and they can be lost.

These are complex areas of tax law requiring advice. SS isnt the place for such personal advice.