Private companies need a capital management strategy too

Recent press coverage of special dividends and capital distributions from some of Australia’s largest listed companies has prompted a range of inquiries from clients who have investments in those companies.

Private companies however also need to think about their own capital management strategy.

It always pays to think ahead, particularly when the Government has promised a 1.5% cut in the company tax rate from 1 July 2015.

Under the ATO’s dividend imputation system, Australian income tax payments (but not the proposed Paid Parental Leave levy paid by large companies) generate franking credits, which can be used to ‘frank’ dividends paid to shareholders.

Talk to us and start planning for a range of post 1July 2015 scenarios including one where the value of flow-through franking benefits to shareholders may be reduced. Depending on the shareholder’s particular circumstances, this could mean more tax payable at shareholder level.

On the other hand, a carefully executed return of share capital to a shareholder is not a frankable dividend and can be treated as non-assessable in the hands of shareholders.

Capital distributions can also have other tax ramifications.

Taking all this into account, company directors need to be aware that making distributions to shareholders requires careful planning.

The more complex the capital management strategy, the more likely it is that tax advisers need time to liaise with the ATO to obtain a private binding ruling that provides certainty to both the company and its shareholders.