A trap for small businesses – wasted franking credits

Date: 23 June 2017

The Tax Institute supports the reductions in the company tax rate for small businesses. However, the Institute does not support the changes to the imputation rules that were introduced when the company tax rate reductions were implemented.

“The changes to the imputation rules will place an unfair burden on small businesses,” said Senior Tax Counsel, Professor Robert Deutsch.

“Dividends may be trapped as a result of the imputation changes that accompanied the company tax rate cuts for small businesses.”

“When the 28.5% rate was introduced in the 2015/16 income year for small businesses that met the $2m turnover test, dividends could still be franked at 30%. Accompanying the increase in the turnover test to $10m and the drop in the corporate tax rate to 27.5% for 2016/17 was a change to the imputation rules.

“The change to the imputation rules means a small business can no longer frank dividends at 30% and they will have to frank at the lower rate of 27.5%. This could have the effect of ‘trapping’ franking credits in the entity and lead to the real possibility that much excess credit will be wasted’, said Professor Deutsch.

“While we support the reduction of the company tax rate for small businesses, we do not support the wastage of franking credits. This is an unfair burden to place on small businesses. This issue may lead to a compounding problem as company tax rates are cut further in accordance with the current Government proposed timetable,” said Professor Deutsch.

“The Tax Institute believes that the Government should reconsider its position in relation to this issue. If the Government is not willing to reconsider its position, it should at the very least allow companies which qualify as small businesses for the $10m cap some limited transitional period (eg 2 years) to enable them to ‘use up’ any unused franking credits before reverting to the lower rate.”