Changes to the Company Tax Rate and Timing of Dividends

 

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For many years the company tax rate has been stable at 30% and the top marginal personal tax rate, including Medicare Levy, has generally been around 46.5%.

This led to consistency in the additional tax payable (“top up tax”) when a fully franked dividend is paid to a resident individual on the top marginal tax rate (i.e. taxable income over $180,000).

This gap widened on 1 July 2014 due to the increase in the Medicare Levy to 2% and the increase in the top marginal tax rate to 47%.

The gap could widen further if the company tax rate is cut to 28.5% from 1 July 2015. This is Coalition policy together with a 1.5% levy on larger companies (aggregate taxable income over $5 million) to fund the proposed paid parental leave scheme.

If these changes are made (and there appears to be a degree of political uncertainty about this measure) then the maximum extent to which a dividend can be franked from 1 July 2015 is $28.50 of franking credits for every $71.50 of cash dividend.

The respective top up tax rates will be as follows:

Year Ended 30 June 2014 2015 2016
       
Small company profit 100.00 100.00 100.00
Company tax rate 30.0% 30.0% 28.5%
Franked dividend 70.00 70.00 71.50
Personal tax rate 45.0% 45.0% 45.0%
Medicare 1.5% 2.0% 2.0%
Deficit Levy 0.0% 2.0% 2.0%
  46.5% 49.0% 49.0%
       
Top up tax 16.50 19.00 20.50
Top up rate 23.57% 27.14% 28.67%


The reduced extent to which dividends can be franked may lead to bringing forward additional franked distributions into the current tax year (subject to the projected balance in the company’s franking account). Please remember that public companies must issue a shareholder dividend statement stating the franked percentage of the distribution when a dividend is paid whereas private companies have until four months after the end of the income year to do so.