Corporate tax developments

Calculating the distributable surplus of private companies

Draft Taxation Determination TD 2008/D8, which was issued on 18 June 2008, outlines the Commissioner’s view as to the circumstances where income tax of a private company is a ‘present legal obligation’ for the purposes of the distributable surplus calculation under the deemed dividend rules applying to private companies and their shareholders. The importance of this is that a loan or payment made by a private company to a shareholder (or associate) cannot be a deemed dividend where there is no distributable surplus of the private company at the relevant year end.

In the draft Taxation Determination, the Commissioner states that:

• where a private company has an ‘instalment rate’, the amount of any unpaid instalment at 30 June is a ‘present legal obligation’ for the purposes of the distributable surplus calculation worked out at that time

• where a private company has an amount due and payable as a full self-assessment taxpayer by reason of subsection 204(1A) of the Income Tax Assessment Act 1936 (ITAA 1936), this is not a present legal obligation for the purposes of the distributable surplus calculation worked out at 30 June of the income year which is subject to the deemed assessment under section 166A of the ITAA 1936. However, to the extent that the amount remains unpaid at 30 June of a following income year, it will be a present legal obligation for the purposes of the distributable surplus calculation worked out at that time. Under subsection 204(1A), the tax payable by the company with a 30 June year end becomes due and payable on 1 December following the end of the tax year. This amount is the balance payable on the assessment deemed to arise on lodgement of the tax return. In the Commissioner’s opinion the balance due on 1 December, or later as allowed by the Commissioner, is not a present legal obligation at the earlier 30 June

• where a private company has an amount due and payable at 30 June of an income year by reason of the former subsection 221AZK(2) of the ITAA 1936, this is a present legal obligation of the private company for the purposes of the distributable surplus calculation worked out at that time. Under former subsection 221AZK(2) (which ceased to apply for the 2001 and later income years) 50 percent of a ‘large company’s’ likely tax was required to be paid by two instalments by 1 June of the relevant year, and 25 percent of a ‘medium company’s’ likely tax was required to be paid must be paid by 1 June of the relevant year. In the Commissioner’s opinion the remaining instalments and final tax for these companies, and the tax payable on the taxable income by a ‘small company’ is not a present legal obligation at the earlier 30 June, and

• where the Commissioner issues a private company with an amended assessment for any income year, the amount payable under the amended assessment will not be a present legal obligation for the purposes of the distributable surplus calculation worked out as at the end of the income year subject to the amended assessment. To the extent the amount payable under the amended assessment remains unpaid, it will be a present legal obligation for the purposes of the distributable surplus calculation worked out as at the end of the income year in which the amended assessment is made and served on the private company.

Comments on the draft Taxation Determination are to be made by 18 July 2008.

For further information, please contact your usual PricewaterhouseCoopers adviser, or:

Mike Forsdick, Partner
Phone: +61 2 8266 5767
mike.forsdick@au.pwc.com

Chris Lowe, Partner
Phone: +61 7 3257 8561
chris.h.lowe@au.pwc.com

Cesare Scalise, Partner
Phone: +61 8 9238 3417
cesare.scalise@au.pwc.com

Bruce Ellis, Partner
Phone: +61 3 8603 3303
bruce.ellis@au.pwc.com

In our February 2008 edition of TaxTalk, we featured changes to the research and development (R&D) tax concession, designed to encourage multinational corporate groups (MNCs) to undertake R&D activities in Australia. The features of the changes include:

• the premium 175 percent R&D tax concession has been extended to foreign owned R&D activities of members of MNCs, where R&D is carried out by an Australian resident (local) company wholly or primarily on behalf of a foreign company resident in a country with which Australia has entered a double tax agreement

• resulting intellectual property can be held off-shore

• the deduction at the 175 percent rate applies for incremental expenditure above a rolling three-year average

• attractive transitional provisions apply, which allow 20 percent of applicable expenditure to be deductible at the 175 percent rate in the first income year commencing after 30 June 2007, and

• the local company can be reimbursed by the foreign company.

• in order to access the concession, bi-lateral agreements between the local company and the foreign company on whose behalf the R&D activities are being undertaken must be in place by the end of the first full income year ending after 30 June 2007 (generally by 31 December 2008 for a December balancing company), and

• companies failing to register R&D activities specific to this concession within the first full income year ending after 30 June 2007 will not only lose the benefit of the transitional entitlements, but will be required to build a three-year history of R&D (which includes registering R&D plans with AusIndustry, and compiling R&D expenditures) without any measurable cash benefit until the fourth consecutive year of registering for, and claiming, the concession.

Gary Waugh, Partner
Phone: +61 7 3257 8694
gary.waugh@au.pwc.com

Sandra Mason, Partner
Phone: +61 2 8266 0470
sandra.mason@au.pwc.com