I am an owner of a business,we have excess money in the bank which is available to take as a dividend,It has already been subject to company tax.If we take it we have been told we have to pay the tax difference between company and personal tax(13%).My question is if we leave the money in the bank until oneday the business is sold,will it be exempt from the extra tax or will it still be taxed.The business is over 15yo and not subject to capital gains tax on sale.
Seems better to take money now and invest it if it will still be subject to the tax either way.
Just to make sure you clearly understand how this works. If a company makes $100 in profit it pays $30 tax leaving (in theory) $70 cash. When it distributes that $70 to a shareholder as a fully franked dividend the shareholder declares $100 in income ($70 received in cash and a tax credit or $30) which is taxed at their marginal rate, so $46.50 if you are in the maximum tax bracket. But when you go to pay the tax you are allowed to use the franking credit you received from the company so you only pay $16.50 at the most.
All shareholders holding the same class of shares must receive the same amount of dividends. The idea is to look for years when the shareholders’ tax brackets are lower. Here are the tax rates
The following is not a list of the tax rate thresholds but instead is a list showing the tax rate for the last dollar in income that you have. It is done this way to allow the low income tax offset to be taken into account.
So if for example in 2012/2013 you earn $80,000, the previous dollar would have been taxed at 32.5% and the next dollar at 37% (excluding Medicare)
2011/2012 2012/2013 2015/2016
Zero tax up to $ 16,000 $20,542 $20,979
15% tax up to $ 30,000
19% effective tax up to $ 37,000 $ 37,000 $ 37,000
34% effective tax up to $ 67,500 $66,660 $67,000
32.5% up to $80,000
33% up to $80,000
30% up to $ 80,000
37% up to $180,000 $180,000 $180,000
Maximum Tax Rate 45% 45% 45%
The above does not include Medicare which will probably be 2% in the future
If you can keep your income under $80,000 there will not be much top up tax at all.
Maybe contributing to super in this year will help you reduce your taxable income so you can receive the dividend at a lower rate.
I know it hurts to pay the top up tax but I wish I had your problem. You are absolutely right about leaving the money sitting in the bank when it could be invested but why not consider investing the funds in the company name so that the investment income also benefits from the company tax rate and later when you retire and are in a lower tax bracket take the money out. The disadvantage of leaving the money in the company is it is not the best form of asset protection as your investment is exposed to the business risk.
The sale of the business will benefit from the 15 years CGT small business concession but that won’t help you get the retained profits out. Generally it is the business that sells not the company itself so you could continue to keep it open for a few years to slowly pay out the dividend while you are in a lower tax bracket.
Please do not act on this advice without consulting an accountant who fully understands your circumstances as this answer is limited to the information you provided.