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Companies face tax grab on investment allowance savings

Businesses looking to take advantage of 30 percent investment allowance may be subjected to tax hike due to an "anomaly"

By Michael House

Businesses looking to take advantage of the Federal Government’s 30 percent investment allowance are being warned they may be subjected to a tax hike due to an “anomaly”.

Director of Sydney-based Murray Consulting Jason Murray says while the tax incentive is a good initiative, companies need to make sure they get the maximum benefits.

According to Murray says companies wanting to distribute their savings from the tax benefit to shareholders through dividends may be taxed close to 50 percent because the money will be treated as an unfranked dividend.

“It is true that the company will be able to reduce its income tax payable and as such the investment allowance provides the company with a deferral of tax,” Murray says.

“The problem lies however when the company wishes to distribute profits out of the company to shareholders by way of dividend.

“The reason for this anomaly is that any distribution of profits out of a company which have not been subject to tax [as a result of claiming the investment allowance] will ultimately be distributed out to shareholder as an unfranked dividend.”

“Unlike a franked dividend which has a franking credit attached, the unfranked dividend is subject to tax in the individual shareholders hand at their marginal income tax rate which can be as high as 46.5 percent”.

Murray, whose clients includes transport operators, says operators should purchase equipment through a different structure to the main entity of the business, such as a family trust fund for smaller operators.

“Depending upon the transport business corporate structure, there is a strong preference for purchasing operating assists of a business in a different structure to the main operating entity,” he says.

“This overcomes the issue associated with purchasing assets within a company structure as well as other potential benefits such as increased asset protection and tax planning.”

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