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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 117
A decision is made to liquidate the company
Tax consequences for 50% trustee shareholders and 50% individual shareholders
Under secon CD 26 Maggio Ltd can return the available subscribed capital per share
calculated under the ordering rule and the available capital distribuon amount calculated
under secon CD 44 tax free. Only an amount in excess of this amount will be subject to tax.
The total amount returned to shareholders per share is $2.58.
The available subscribed capital per share is calculated under secon CD 23 as discussed
previously, however in this case all shares are being cancelled. This means both the
numerator and the denominator will be 100,000 so the available subscribed capital per share
is $1.
The available capital distribuon amount is calculated using the formula and secon CD 44
(1). In respect of one share the inial calculaon of the amount of receipt less ASC per share
is $1.58 ($2.58 - $1). This is mulplied by the capital gains ($50,000) plus any capital property
distributed minus its cost (nil), less any capital losses (Nil); divided by total receipts minus
total available subscribed capital ($258,000 minus $100,000).
Receipt – ASC per share = 2.58 – 1 = 1.58
Capital gains + capital property distributed – cost = 50,000 + 0 – 0 = 50,000
Total receipts – total ASC = 258,000 – 100,000 = 158,000
$1.58 mes 50,000 divided by 158,000 equals $.50 per share. This is the available capital
distribuon amount. The excess beyond these two amounts totalling $1.50 constute a
dividend of $1.08 which will be taxable. However imputaon credits will be aached (at the
rate of a maximum of 28/72 per secon OA 18) and these will be able to be offset against the
resultant tax liability for the two shareholders.
The formula is 1.58 x 50,000
÷ 158,000 = 0.5
So, shareholders get $2.58 per share, but $1 of it is tax-free ASC, and $0.50 of it is
tax-free capital profits
Therefore, the $1.08 extra is a taxable dividend
TAXATION OF CASH DIVIDENDS
The overall regime for taxaon of dividends:
o
Is there an assessable dividend (i.e. a transfer of value)?
o
Deal with imputaon credits:
The company first pays tax on the gross profits, then pays the net profit as a dividend
The company can impute credits to the dividend at a maximum rao of 28/72
o
If the payment is to an individual, resident withholding tax must also be withheld from the dividend
IMPUTATION CREDITS
Under a classical corporate tax system:
o
The company pays tax on its profits at 28% – they then distribute the taxed profits as a dividend
o
Shareholders pay tax on the dividend
o
Therefore, the same amount of economic income gets taxed twice
A dividend derived by a person is income of the person (
secon CD 1
)
This aligns with the long-standing treatment in the common law that any return to
shareholders was dividend income
The common law has long held that there are two separate forms of income here:
The income the company derives (e.g. from carrying on a business)
The income derived by the shareholder from the company (dividends) – this income
is separate from the company’s income
The problem here is that the same economic income is being derived by the company and
the shareholders, and thus is taxed twice – the company makes a profit (which is taxable),
which it distributes to shareholders as a dividend (which is taxable)
As a result, New Zealand has developed the imputaon regime – shareholders get a
credit for the tax that the company has paid
Example
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