In the eyes of the tax office, companies are treated much like individuals in that they are required to pay tax on their taxable income. This is usually at a rate of 30% and is also known as the corporate tax rate. All businesses in Australia are required to lodge an annual company tax return. The financial year for income tax purposes ends on 30 June every year. Lodgment of your company income tax return is due on or around 28 February, while this may seem like some time away it’s a good opportunity to get your business’ accounts in order.
Unlike with individual income tax returns the Tax Office does not issue Company Income Tax Notice of Assessments. Whilst most companies do make Income Tax payment installments throughout the year there is usually a shortfall at the end of the period that needs to be settled. You will not receive a Notice of Assessment from the Tax Office for your Company Income Tax, so please do not think that you can wait until you receive this notice before lodging your payment.
The different business structures and entities have different reporting and lodgement requirements.
As a sole trader you are required to lodge your income (or loss) from the business within your individual income tax return.
A business operating as a partnership must lodge a partnership tax return – made up of income minus deductions and expenses. However, when it comes to the income (or loss) that you made as an individual from the partnership, this is to be reported in your individual income tax return.
A trust structure has its own trust tax return that is to be lodged – it is made up of income minus any deductions and expenses. If you are a beneficiary of a trust, you need to include any income that you receive from the trust in your individual income tax return.
A company will need to lodge a company tax return – made up of income and its tax liability. This is worked out in the following way:
[assessable income – allowable deductions = taxable income]
x 30%(company tax rate)
= tax liability
Shareholders of these companies are also taxed on the profits distributed to them by the company (known as dividends). In order to avoid double taxation, there is an imputation system in place which provides shareholders with credits for tax already paid by the company.
The imputation system works by providing shareholders of a company with a tax offset called a “franking credit” for tax paid by the company. This franking credit then acts to offset the tax payable by the shareholder on their individual tax return. However, it is important to note that in order for the imputation system to apply, both the company and the shareholder must be residents of Australia.
Distributions made to shareholders form part of their assessable income- this includes dividends paid out of the company’s profits and also non-share dividends.
The world of tax can be extremely complex and if obligations are not adhered to it can often become quite stressful, not to mention costly. The accountants, lawyers and tax agents at The Quinn Group are able to assist you with all tax and ATO related matters. For advice or more information contact us now by submitting an online enquiry form or call 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to book an appointment.