Taxation of Individuals, Partnerships, Trusts and Companies
Individuals
Individuals are taxed on taxable income at progressive rates, with the tax-free threshold, low income tax offset, and Medicare levy. Non-residents are taxed from the first dollar. Candidates must know the treatment of salary, allowances, and the personal services income rules that attribute income to the individual.
Partnerships
A partnership is not a separate taxpayer. Each partner includes their share of net partnership income in their own return, with the character of the income preserved. Partners cannot salary-sacrifice partnership profits. Losses are shared according to the agreement.
Trusts
A trust is generally a flow-through vehicle. Beneficiaries are taxed on present entitlement, and the trustee is taxed on behalf of minors or on accumulated income at the top marginal rate. The trustee may be assessed under s 99A where no beneficiary is presently entitled. Streaming of capital gains and franked dividends requires specific trust deeds and the ATO's guidelines.
Companies
Companies pay a flat rate (25% for base rate entities, 30% otherwise), with franking credits attaching to distributions. Dividends are included in shareholder assessable income with a gross-up and franking credit offset. Losses are subject to the continuity of ownership and same business tests.
Traps
A common trap is treating a partnership as paying tax, or forgetting that a trust beneficiary's entitlement must be present and vested. Another is applying the corporate rate to a partnership. Questions also test whether a distribution is a dividend or a loan (Division 7A).
Worked example
A company earns $100,000, pays $25,000 tax (base rate entity), distributes $75,000 franked. The shareholder grosses up to $107,143 and claims a $32,143 franking credit.