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Australia Taxation – Advanced study materials
Australia Taxation – Advanced study resources

Australia Taxation – Advanced: Taxation of business entities and structures

Australia Taxation – Advanced · Work through your exam, one topic at a time.

All guide sections

Taxation of business entities and structures

This domain tests the tax treatment of the four main business vehicles - sole trader, partnership, company and trust - and the consequences when a business changes structure. Calculations on company tax, imputation and Division 7A dominate.

Company tax and the base rate entity

  • Companies pay 30%; base rate entities (BREs) pay 25%.
  • BRE test: aggregated turnover below $50 million and no more than 80% of assessable income is base rate entity passive income - dividends, interest, royalties, rent, capital gains, trust distributions and non-share equity deductions.
  • Aggregated turnover includes connected entities and affiliates, not only the company's own turnover.

Imputation mechanics

  • Franking credit = dividend × rate ÷ (1 − rate): 25/75 at the 25% rate, 30/70 at 30%.
  • The franking account is kept on a tax-paid basis; franking debits arise when distributions are made.
  • The benchmark rule (Div 207) requires the same franking percentage for all shareholders of a class.
  • Individuals and complying super funds receive excess credits as refunds; companies carry them forward.

Worked example

A company with $40 million aggregated turnover and 20% passive income derives taxable income of $1,000,000. It is a BRE, so tax is 25% = $250,000. It pays a $750,000 dividend franked to the maximum: franking credit = $750,000 × 25/75 = $250,000. A resident shareholder on the 47% rate includes $1,000,000, pays $470,000 and claims the $250,000 credit, leaving $220,000. Total tax collected is $470,000, matching the shareholder's marginal rate.

Structural issues

  • Division 7A treats loans, and unpaid present entitlements from trusts since 16 December 2009, as deemed dividends unless repaid or placed on complying loan terms with minimum yearly repayments.
  • Consolidation applies the single entity rule; entry and exit cost setting and the available fraction determine loss and franking credit utilisation.
  • Div 165 limits carry-forward losses where ownership has changed and the same business test is not met.

Traps

  • Franking at 30/70 when the 25% rate applies, creating excess franking offsets and penalties.
  • Treating a passive trust distribution as active income, pushing the company over the 80% test.
  • Overlooking that a shareholder's loan must be repaid by the lodgment day, not 30 June.