Companies: The Tax Framework
Model Answers
Question 1 — Separate taxpayer
A company is a separate legal and tax entity. Its taxable income is calculated and taxed at company level. The shareholder is taxed only when a separate taxing event or receipt occurs, such as salary, dividend, Division 7A deemed dividend, capital gain or other distribution. Economic ownership does not collapse the two taxpayers.
Question 2 — Base rate entity
The lower company rate requires satisfaction of the statutory base-rate-entity conditions, including the passive-income limitation. A company dominated by rent and interest can fail the passive-income test even though turnover is below the relevant turnover ceiling. The ordinary 30% rate may then apply.
Question 3 — Private expense
The label in the ledger does not control. A private school-fee payment lacks the necessary business nexus for an ordinary deduction unless exceptional facts exist. The payment also requires shareholder/director benefit analysis, potentially including remuneration, dividend or Division 7A consequences, plus PAYG/FBT issues depending on its legal character.
Question 4 — Salary v dividend
Salary can be deductible to the company if properly incurred in producing income and is assessable to the director as employment income, with PAYG and super consequences. A dividend is generally not deductible to the company and is dealt with under the shareholder dividend/imputation rules. The same cash amount can therefore have very different tax effects.
Question 5 — Asset sale
Companies are generally not entitled to the individual/trust 50% CGT discount. The company calculates its capital gain under the CGT provisions and includes the net capital gain in taxable income, subject to any company-specific concessions such as Division 152 if independently satisfied.
Question 6 — Documentation
Tax consequences often depend on whether a valid dividend was declared, whether a loan is legally enforceable and compliant, when obligations arose and what rights parties had at year end. Corporate documents are therefore evidence of the legal transaction that the tax law characterises.