Who pay the tax on company profits in Australia ?

The Company Pays Tax On Retained Profits And Dividends Paid To Foreign Shareholders.

Looking at the graphic, the current tax system is simple and straightforward.

Retained Profits And Foreign Shareholders.

The ATO receives company tax, at company tax rates, for the part of the company’s profit retained by the company, and on dividends paid by the company to foreign shareholders who are not taxed in Australia.

Australian Shareholders.

The ATO also receives tax on dividends paid to Australian taxpayers who receive dividends. This tax ia paid at the shareholder’s individual government set marginal tax rate. This is consistent with all other income tax in Australia. That is, that receivers of income pay tax on that income at their marginal tax rate.

The company pays tax on all its profits before dividends are paid out. Therefore, when dividends are paid out to Australian taxpayers, there needs to be an adjustment from the company tax the ATO has already received from the company, to the tax payable by the shareholder. This adjustment is achieved by the use of franking credits, which simply represent the amount of tax already paid by the company.

Company Tax Adjusted To Shareholder’s Tax Rate.

So Australian taxpayers receiving dividends pay tax at their marginal tax rates minus the value of franking credits attached to their dividends. Usually this requires the taxpayer to pay more tax, but in some cases the tax payable by the shareholder is less than the tax paid by the company, so the taxpayer receives a refund. Irrespective of whether a taxpayer needs to pay more tax, or receives a refund, at the end of the process, the ATO has received the appropriate tax, at the shareholder’s government set tax rate.

Authorized by John Griffith Newcastle NSW