IN THIS ISSUE 01 Trapped Franking Credits
Trapped Franking Credits Joshua Robb - Director | Newcastle
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s you would now be aware, corporate tax rates for companies that are base rate entities (BRE), have been progressively reducing from the historical 30 percent to 25 percent in the 2022 financial year.
Companies that are not considered to be a BRE, will continue to have a corporate tax rate of 30 percent.
03 Debt Collection Methods
04 Getting out of Bankruptcy: Annulments Scan to read more articles
What is a Base Rate Entity? Section 23AA of the Income Tax Rates Act 1986 outlines that a base rate entity is entitled to the benefit of the lower tax rates and subsequent franking rates, if the following conditions have been satisfied: ►
No more than 80 percent of the company’s assessable income for the income year is passive income; and
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The company’s aggregated turnover for the income year, is less than the relevant threshold for the income year (ie. $25 million in the 2018 financial year and $50 million in the 2019 financial year)
Passive Income Passive income is commonly defined as income that has not been derived from actively being involved in a business. Examples of passive income include: ► ► ► ► ►
Interest; Rental income; Royalties; Dividends (except non-portfolio); and Net Capital Gains
Franking Rates
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The maximum franking rate that a company can utilise is equal to the tax rate applicable in the financial year that the dividends are paid. It is important to note that the maximum franking rate is not determined by the rate at which the profits were actually derived and taxed. Liability limited by a scheme approved under Professional Standards Legislation
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Below is a summary of the franking rates applicable between the 2019 and 2022 financial years, for a BRE that has an annual threshold of $50 million: 2019/2020 Financial Year
2021 Financial Year
2022 Financial Year
27.5%
26%
25%
30%
30%
30%
Turnover is < $50 million & passive income is < 80% of assessable income Turnover is > $50 million &/ or passive income is > 80% of assessable income Implications in Reduction of Tax Rate
A company that has paid tax at the historical rate of 30 percent in previous financial years, would have accrued franking credits of $30 for every $100 of taxable income. As outlined in the above table, from 1 July 2022, the maximum franking rate for a BRE will be 25 percent. In summary, this means that any dividends paid in the 2022 financial year, will have a maximum franking rate of 25 percent. This results in the balance of the franking credits becoming “trapped” in the company and are unable to be passed on to shareholders. Below is a representation of the “trapped” franking credits between the various tax rate: Tax Rate 30%
Tax Rate 27.5%
Tax Rate 26%
Tax Rate 25%
$ 30.00
$ 26.55
$ 24.59
$ 23.33
Lost Franking Credit ($)
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$ 3.45
$ 5.41
$ 6.67
Lost Franking Credit (%)
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11.5%
18%
22%
Franking Credit
Members Voluntary Liquidation As a company continues to trade, up to 22 percent of its accrued franking credits (utilising the 2022 tax rates) can be trapped and never utilised. In addition, members may have to fund the shortfall between the available franking credit and their marginal tax rate. One solution is to place the company into a Members Voluntary Liquidation (MVL) and pay dividends to shareholders in a tax effective way. If the company ceases to trade, it may no longer be considered a BRE and will revert to the original 30 percent tax rate. In this instance, all distributions can then be franked to the maximum 30 percent, to the extent of the available franking credits. For companies that are progressing towards a close down scenario, it will be worth planning the eventual liquidation and deregistration around the available franking credits. An MVL is one alternative that can be used to prevent the wastage of available franking credits. You can find further details on the process and tax benefits of an MVL on our website. About Us SV Partners has a range of comprehensives business recovery and insolvency related services. Our job is to ensure the right approach is adopted to ensure your clients receive the best outcome for their situation. If you would like to discuss the benefits of an MVL and the applicable “trapped franking credits”, contact us to ensure that you benefit from the involvement of our most experienced practitioners.
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Alan Scott Director - Adelaide
Debt Collection Methods
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s part of the Federal Government’s response to the pandemic, the threshold for issuing statutory demands and bankruptcy notices to debtors temporarily increased to $20,000. The timeframe for responding to such demands and notices was also temporarily extended from 21 days to 6 months.
or the SGC obligation is reported by the due date, a director in receipt of a notice may avoid personal liability by making payment of the debt, placing the company into administration or liquidation or the company enters into and maintains a repayment arrangement for the entire outstanding debt; •
Those protections expired at the end of December 2020 and creditors can now: ►
issue statutory demands to companies for amounts of not less than $2,000. The Federal Government is increasing $4000 from 1 July 2021.
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issue bankruptcy notices to individuals for amounts of not less than $10,000. This has increased from the $5,000 threshold which existed prior to the introduction of the temporary relief measures.
More information concerning these temporary measures can be found on our website. As has been reported widely in the media, the temporary measures appear to have resulted in significant unpaid debt in the economy. At some stage creditors are likely to look to recover their debts and may choose to implement any of the following debt collection methods: Individual
Company
Demand
Demand
Legal proceedings
Legal proceedings
Warrant of sale
Calling up personal guarantees
Charging order against property
Statutory demand
In our experience, including prior to the pandemic, many individuals and companies chose to pay other creditors prior to making payment of their taxation and other statutory liabilities effectively treating the ATO and certain other statutory creditors as lenders of last resort. Accordingly, the ATO continues to be one of the larger creditors in any external administration. With the additional pressures applied by the pandemic, the debts faced by these entities are likely to be larger than during what we consider as normal business conditions. We anticipate that the ATO will at some time in the near future, recommence its debt recovery strategy, especially from those debtors that are not engaging in relation to their debts. In circumstances where clients are unable to pay a debt, they may seek to resolve the matter themselves or may seek advice. Accountants and advisors should consider: ►
in the case of a business, reviewing the operations to determine whether the circumstances that gave rise to the unpaid debt have been addressed. An unviable business is almost always not worth saving.
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contacting the creditor to negotiate payment terms.
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seeking advice from a solicitor or a properly qualified insolvency practitioner such as a member of ARITA. Early advice as to the options available to address the situation can assist in resolving a client’s concerns and map a way forward. Options may be informal (eg. negotiated settlements) or formal (eg. voluntary administration, personal insolvency agreements). More information on these options can be found on our website.
Investigation summons Bankruptcy notice In addition to the above collection methods, the Australian Taxation Office (ATO) also has additional powers including: ►
issuing garnishee notices to a debtor’s customers and/or bankers. These notices require the recipient to remit funds directly to the ATO; and
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issuing Director Penalty Notices to company directors in respect of a company’s unpaid superannuation, PAYG withholding and GST. There are two types of notices: •
If the returns were lodged in excess of 3 months of the due date, or the SGC obligation is reported after the due date, the only ways a director may avoid personal liability is to cause the company to pay the debt or the company enters into and maintains a repayment arrangement for the entire outstanding debt.
Contact SV Partners for specialist advice on the options available to deal with unmanageable debt.
If the returns were lodged within 3 months of the due date, Liability limited by a scheme approved under Professional Standards Legislation
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s daunting as it may be, if you have been declared bankrupt, there are options available to you to seek to end your bankruptcy earlier than would otherwise occur (ordinarily, bankruptcy lasts 3 years from the date of lodgement of a Bankruptcy Form). For instance, you may seek to obtain an annulment of your bankruptcy.
Getting out of Bankruptcy: Annulments
The term “annulment” is commonly used to describe the end brought to a marriage between a couple. By definition, if something is annulled, it is void and legally considered never to have existed or occurred. In relation to a bankruptcy, annulment has a similar meaning. If a bankruptcy is annulled, the bankrupt estate is brought to an end and legally taken not to have occurred. There are however different types of annulments in bankruptcy and each type of annulment has a different process.
notice of a petition for their bankruptcy filed with the Court) or may occur where a bankrupt is solvent and able to pay their debts (and therefore should not have been declared bankrupt).
Annulment by payment of costs and debts in full
Similar to the above, the Court can also setaside a bankruptcy in circumstances where a bankruptcy ought not have occurred.
Pursuant to section 153A of the Bankruptcy Act 1966 (Cth) (the Act), where sufficient funds are realised from divisible property, or funds are made available by a third party to a bankrupt estate (usually a family member or friend), a bankruptcy may be annulled by paying all of the bankrupt’s debts in full. Under section 153A(6) of the Act, “bankrupt’s debts” means: “all debts that have been proved in the bankruptcy and includes interest payable on such of those debts as bear interest, and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee.” If a bankruptcy trustee is satisfied all the bankrupt’s debts are paid in full, the bankruptcy is annulled at the time of the last payment being made. Annulment by Order of the Court
Daniel Luckman - Senior Manager | Sunshine Coast
Annulment by way of creditors’ acceptance of a proposal by a bankrupt A bankrupt may seek to reach a financial arrangement with creditors to compromise their debts (Section 73 Proposal) and achieve an annulment of their bankruptcy pursuant to section 74 of the Act. A Section 73 Proposal typically involves the payment of money to a fund by the bankrupt or a third party (in a lump sum or by way of payments over time) which is distributed to pay the costs of the bankruptcy and a portion of creditors’ provable debts. The Composition Proposal may include assets or funds that would ordinarily be recoverable by a bankruptcy trustee, such as the proceeds from the sale of a motor vehicle or real property. A bankrupt would usually liaise with their bankruptcy trustee to formulate and execute a Section 73 Proposal to their creditors.
An Order can be made by the Court to annul the bankruptcy pursuant to section 153B of the Act where the Court is satisfied the bankruptcy ought not have occurred. This Court application is usually filed by an aggrieved bankrupt.
The bankruptcy trustee will then prepare a report to creditors to provide a recommendation to creditors on whether or not they should accept the Section 73 Proposal and call a meeting of creditors at which creditors will vote on the Section 73 Proposal.
Successful applications pursuant to section 153B of the Act are rare and usually happen when there has been a procedural error leading up to the bankruptcy (such as in the case when a bankrupt did not receive correct
To accept a Section 73 Proposal, creditors must pass a Special Resolution. A Special Resolution is passed if, based on creditors in attendance at the meeting (in person, by proxy or by returning an assent/dissent
form): a) A majority of creditors in number vote in favour of the resolution; and b) Creditors holding at least 75% of the value of creditors in attendance at the meeting vote in favour of the resolution. If creditors resolve to accept the Section 73 Proposal, the bankruptcy is annulled at that time. Main differences between annulments One of the main differences between the above annulments is that annulments pursuant to section 153A and 153B of the Act do not result in the release of provable debts of a bankrupt; that is, after an annulment has occurred, a creditor that remains unpaid can pursue the bankrupt for payment of a debt owed in the normal manner. In contrast, after an annulment pursuant to section 74 of the Act, a bankrupt is released from their provable debts (just as they would be if they had been discharged from bankruptcy). If a bankrupt has been discharged from bankruptcy, an annulment pursuant to section 74 of the Act is no longer available to them; however, an annulment pursuant to section 153A of the Act can still be achieved. Annulments are different to proposals to settle debts prior to a bankruptcy. Proposals prior to bankruptcy will be discussed in a later newsletter article. Obtaining the annulment of a bankruptcy requires specialist advice and guidance. There are many nuances involved in obtaining an annulment which vary depending on an individual’s circumstances. The outcome achieved can also be impacted on how successfully the process is managed.
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