Deck 11: Taxation of Companies

Question 1

During the 2019-20 tax year TRS Ltd (which is not a base rate entity) made an operating profit of $20,000 and received a fully franked dividend of 5,000. Assuming it has no other income or deductions, TRS Ltd's income tax payable for 2019-20 would be:

A) $2,143
B) $6,000
C) $8,143
D) $7,464

Answer 1

$6,000

Question 2

Alpha Pty Ltd incurred a tax loss for the year ending 30 June 2020 of $15,000.
Which statement is the most complete in determining the ability to deduct the tax loss in a future year?

A) The company must carry on a similar business in the future year as was carried on in the loss year.
B) The company must have the same shareholders in the year that the loss was incurred as it had when the profit was made.
C) If the shareholders in the year that the loss was incurred hold less than 50% beneficial ownership of the shares when the company made a profit then the company must carry on the same or similar business as it did in the year of the loss.
D) The company can carry forward the tax loss like any other taxpayer.

Answer 2

If the shareholders in the year that the loss was incurred hold less than 50% beneficial ownership of the shares when the company made a profit then the company must carry on the same or similar business as it did in the year of the loss.

Question 3

In the 2019-20 tax year Sky Pty Ltd paid its shareholders a $3,600 dividend franked to 70%. The franking credits attached to the dividend are?

A) $2,520
B) $1,543
C) $1,080
D) Nil

Answer 3

$1,080

Question 4

Rankin Pty Ltd, a resident private company, paid an interim dividend of $7000 with a franking credit of $3000. The final dividend was $21,000 with a franking credit of $4,500.
What is the overall effect on the franking account from the final dividend?

A) Debit $4,500
B) Credit $4,500.
C) Debit $9,000
D) Credit $4,500

Question 5

ABC Pty Ltd is a resident private company with a taxable income of $2,000,000 in the 2019-20 tax year before the following information is processed
The Australian Taxation Office (ATO) considered that the company paid an excessive salary to an employee who is also a shareholder in the company. ABC Pty Ltd had paid the employee a salary of $300,000 which the tax office considered was excessive and it should have been $200,000.
What effect does this decision have on the taxable income of ABC and the employee/shareholder's assessable income?

A) The company's taxable income will be $1,900,000 and the employee's assessable income will be $200,000
B) The company's taxable income will be $2,000,000 and the employee's assessable income will be $300,000
C) The company's taxable income will be $2,100,000 and the employee's assessable income will be $200,000
D) The company's taxable income will be $2,100,000 and the employee's assessable income will be $300,000

Question 6

Which of the following is a private company for tax purposes?

A) A company listed on a stock exchange where, at any time during the income year, 20 or fewer persons held 75 per cent or more of the company's capital, voting or dividend rights
B) A subsidiary of a listed public company
C) A non-profit company
D) A company whose shares were listed on a stock exchange (anywhere in the world) on the last day of the income year

Question 7

VKC Enterprises Pty Ltd had Australian assessable income of $260,000 and received some foreign income, which consisted of the following: a cash dividend from a Singaporean company for $9,000 (net of $1,000 Singaporean tax that had been withheld from that payment) and interest from a US bank of $4,500 (net of $500 in US withholding tax withheld from it). What is the assessable income of VKC Enterprises?

A) $260,000
B) $275,000
C) $273,500
D) $274,500

Question 8

Which of the following is true for the similar business test in section 165-13 ITAA97?

A) Does not apply if the continuity of ownership test is failed
B) Has been replaced by the same business test
C) Is much more restrictive than the same business test
D) Will be passed if the 'new' business is using mostly the same assets as the former business to generate assessable income

Question 9

Ace Developers Pty Ltd is an Australian resident private company. It has an annual turnover of $28.5 million, and has registered for the R&D tax concession with the Department of Industry, Innovation and Science. During the 2019-20 income year, it incurred expenditure of$480?000eligible R&D activities. What amount of the R&D tax offset is the company able to claim?

A) $184,800
B) $208,800
C) $480,000
D) Some other amount

Question 10

Daisy, an Australian resident taxpayer, received a fully franked dividend of $2,800 from a small family company; Step Up Pty Ltd. Step Up Pty Ltd is a base rate entity (and so pays tax at 27.5%). What amount does Daisy have to include in her assessable income as a result of receiving this fully franked dividend?

A) $4,000
B) $1,062
C) $2,800
D) $3,862

Question 11

During the 2020 tax year, Azure Services Pty Ltd (a private company for tax purposes) lent $80?000a shareholder (Jason). Assume that by the date of lodgement of the company's 2020 income tax return, the loan has not been repaid by Jason, nor has a loan agreement on commercial terms been drafted in relation to the$80?000to Jason. Assume also that the company had a distributable surplus of $60,000 as at 30 June 2020. How is this loan treated under Division 7A?

A) $80,000 unfranked dividend
B) $60,000 unfranked dividend
C) $80,000 franked dividend
D) $60,000 franked dividend

Question 12

Austronational Enterprises Pty Ltd had a balance in its franking account as at 1 July 2019 of $20,000 (credit). During the 2020 tax year the company paid $160,000 in PAYG instalments; received a refund of tax of $30,000 (for the 2019 tax return) and paid out a fully franked dividend of $600,000. The company's tax rate is 27.5%. What is the company's franking account balance as at 30 June 2020 and would there be any consequences for this balance?

A) ($107,143) debit balance requiring a payment of FDT of $107,143
B) ($77,586) debit balance requiring a payment of FDT of $77,586
C) $150,000 credit balance and no action required
D) ($450,000) debit balance requiring a payment of FDT of $450,000

Question 13

Ezy Cleaners Pty Ltd has a benchmark percentage of 60 per cent in the current franking period and a benchmark percentage of 20 per cent in the immediately preceding franking period. Ezy Cleaners is planning to pay this first dividend in this next franking period. Does Ezy Cleaners Pty Ltd have a disclosure requirement?

A) No, as it has not made a significant variation in its benchmark franking percentage
B) No, as such disclosure requirements are only imposed after a tax audit
C) Yes as it has made a significant variation in its benchmark franking percentage
D) Yes, as all companies have this disclosure requirement

Question 14

Which of the following loans would not give rise to a Division 7A deemed unfranked dividend for the year ended 30 June 2020?

A) An unsecured loan at the interest rate of 6% for a loan term of 5 years
B) An unsecured loan at an interest rate of 8% for 10 years
C) An unsecured loan at the interest rate of 1% for a loan term of 7 years
D) An unsecured loan at the interest rate 4% for a loan term of 8 years

Question 15

Western Districts Business Pty Ltd is a base rate entity (tax rate of 27.5%) and in May 2020 the company distributed dividends as follows: (i) all franked dividends were to go to shareholders who were either residents or pensioners or retirees; (ii) all unfranked dividends to go to other shareholders. Can the ATO challenge the distribution made in May 2020 under its anti-avoidance measures?

A) No, there is no issue at stake that would concern the ATO with this distribution
B) Yes, this is a breach of the benchmarking rule
C) No, this is not an example of dividend streaming
D) Yes, as this is an example of dividend streaming

Question 16

On 15 September 2019, Balloon Flights Ltd made a frankable distribution of $2,200 that was franked to 80%. On 15 March 2020, the company made another distribution, this time of $2,000 that was franked to only 40%. Balloon Flights Ltd is not a base rate entity and has a tax rate of 30%. Does the company have any issue with the change in the franking percentages used?

A) This is under-franking and would result in a franking shortfall of $342.86
B) This is under-franking but there would not be any franking shortfall
C) This is over-franking and there would be no penalty
D) This is over-franking and would result in the payment of franking deficit tax

Question 17

Which of the following is not part of the proposed changes to Division 7A that were originally announced in the 2016/17 Commonwealth Budget?

A) The benchmark interest rate that will be applied to Division 7A loans will be changed to the Reserve Bank of Australia's Small Business Variable Overdraft rate, which is currently 7.74 per cent (compared to the current rate of 5.37%)
B) There will be no requirement for a formal written loan agreement,
C) There will be one '10-year loan model' for all loans made by private companies.
D) All existing loans, entered into before these new measures take effect, will be extinguished

Question 18

During the 2020 tax year, Bickle Pty Ltd (a private company for tax purposes) lent $100?000a shareholder (Travis). Assume that by the date of lodgement of the company's 2020 income tax return, the loan has not been repaid by Travis, nor has a loan agreement on commercial terms been drafted in relation to the$100?000to Travis. Assume also that the company had a distributable surplus of $180,000 as at 30 June 2020. How is this loan treated under Division 7A?

A) $180,000 unfranked dividend
B) $100,000 unfranked dividend
C) $80,000 unfranked dividend
D) No tax effect for Travis

Question 19

On 15 September 2019, Balloon Overflights Ltd made a frankable distribution of $2,000 that was franked to 40%. On 15 March 2020, the company made another distribution, this time of $2,600 that was franked to 80%. Balloon Overflights Ltd is not a base rate entity and has a tax rate of 30%. Does the company have any issue with the change in the franking percentages used?

A) $445.71 franking shortfall would apply
B) $891.43 franking shortfall would apply
C) $445.71 franking deficit tax would be payable
D) $891.43 franking deficit tax would be payable

Question 20

Nifty Enterprises Pty Ltd is an Australian resident private company. It has an annual turnover of $9 million, and has registered for the R&D tax concession with the Department of Industry, Innovation and Science. During the 2019-20 income year, it incurred expenditure of$120?000eligible R&D activities. What amount of the R&D tax offset is the company able to claim?

A) $46,200
B) $120,000
C) $10,800
D) $52,200

Question 21

If accounting net profit for BBC Hardware Pty Ltd was $450,000, what would the taxable income in light of the following (which were all included in accounting net profit):
· Meal entertainment for client expenses of $62,000
· Amortisation expenses for goodwill of $50,000
· Franked Dividend received by the company of $70,000

Question 22

The Shareholders' Equity part of the Balance Sheet of Northeast Enterprises Pty Ltd shows the following: Paid up capital = $40,000; Retained Profits = $220,000; Non-Commercial Loans from prior years = $60,000. What is the distributable surplus for Northeast Enterprises Pty Ltd?

Question 23

Rhesus Services Pty Ltd (a private company for tax law purposes) has an opening franking account surplus of 35,000.
During the 2019-20 income year the company entered into the following transactions:
On 28 July 2019, paid a PAYG instalment of $26,400
On 31 August 2019, paid a dividend of $80,000 with a franking percentage of 80%
On 28 October 2019, paid a PAYG instalment of6,400
On 28 February 2020, paid a PAYG instalment of6,400.
On 14 April 2020, paid a dividend of280?000a franking percentage of 80%.
On 29 April 2020, paid a PAYG instalment of6,400.
On 15 May 2020, paid FBT owing of12,800.
Assume that the company has a company tax rate of 30 per cent.
What is the closing balance of the company's franking account for the year ended 30 June 2020? Round all transactions to the nearest whole dollar.

Question 24

During the 2019-20 tax year, Top Shelf Services Pty Ltd (which is not a base rate entity and which accounts on a cash basis) received payments from customers of $340,000. The company made payments for various business operating expenses (not of a capital nature) of $210,000. The company also received a fully franked dividend of $70,000 and had paid PAYG instalments for the 2019-20 year of $45,000. Assuming it has no other income or deductions, would Top Shelf Services Pty Ltd have further tax to pay or could it expect to receive a tax refund for the 2019-20 tax year?

Question 25

Holiday Fun Pty Ltd ran a caravan and leisure resort but ran into financial problems and for the year ended 30 June 2019 the company made a tax loss of $80,000. On 1 July 2019 the company decided to change its business completely and closed down the caravan and leisure resort and instead operated a public hotel in the town. For the year ended 30 June 2020, Holiday Fun Pty Ltd made a net profit (before any losses were applied) of $140,000. What is Holiday Fun's taxable income for the year ended 30 June 2020?