Minimum Distributions by Companies
16.62. The fact that the rate of company tax will be less than the maximum marginal rate of personal tax will leave the prospect of the use of a company as a tax shelter by a high-income shareholder. The present undistributed profits tax on private companies will continue to be necessary to ensure that minimum distributions are made, and its possible extension to all companies is considered later in this chapter.
16.63. The amount of a minimum distribution required of a private company will need to be re-examined. The likely preference of company management for self-finance has to be recognised, but the fixing of a minimum distribution should reflect the level of distribution necessary to ensure that the company is not used as a tax shelter by high-income shareholders. Under an imputation system, the level of a minimum distribution should, prima facie, be higher than under the present system. But this would not take account of any increase in the rate of company tax or the Committee's proposals for the introduction of a capital gains tax.
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| Shareholder's marginal rate | ||||||
| 20 per cent | 30 per cent | 40 per cent | 50 per cent | 60 per cent | 66 2/3 per cent | |
| $ | $ | $ | $ | $ | $ | |
| 1. Company profit before tax | 200.00 | 200.00 | 200.00 | 200.00 | 200.00 | 200.00 |
| 2. Company tax (50 per cent) | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
| 3. Company profit after tax (1–2) | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
| 4. Retained by company (50 per cent) | 50.00 | 50.00 | 50.00 | 50.00 | 50.00 | 50.00 |
| 5. Dividend to shareholder (3–4) | 50.00 | 50.00 | 50.00 | 50.00 | 50.00 | 50.00 |
| 6. Gross up on dividend (shown in 5) by ¼ | 12.50 | 12.50 | 12.50 | 12.50 | 12.50 | 12.50 |
| 7. Amount shown in shareholder's tax return (5 + 6) | 62.50 | 62.50 | 62.50 | 62.50 | 62.50 | 62.50 |
| 8. Tax (on 7) at marginal rate | 12.50 | 18.75 | 25.00 | 31.25 | 37.50 | 41.66 |
| 9. Tax credit (= 6) | 12.50 | 12.50 | 12.50 | 12.50 | 12.50 | 12.50 |
| 10. Tax payable by shareholder | nil | 6.25 | 12.50 | 18.75 | 25.00 | 29.16 |
| 11. Total tax paid by company and shareholder (2 + 10) | 100.00 | 106.25 | 112.50 | 118.75 | 125.00 | 129.16 |
| 12. Under a separate system with 50 per cent tax rate and 50 per cent distribution, the total tax paid by company and shareholder would be: | 110.00 | 115.00 | 120.00 | 125.00 | 130.00 | 133.33 |
| 13. The net of tax gain to shareholder of one-quarter imputation on this basis would be: | 10.00 | 8.75 | 7.50 | 6.25 | 5.00 | 4.17 |
| 14. Under the 1972–73 public company rate of 47½ per cent with a 50 per cent distribution, the profit after tax would be $105 and the retention and dividend each $52.50. Were the assumption made that the absolute sum of retention would remain constant at $52.50 after the tax rate is increased to 50 per cent and one-quarter imputation operated, the dividend would decrease to $47.50. The net of tax gain to shareholder, using these assumptions and despite the reduction in dividend from $52.50 to $47.50, from the adoption of one-quarter imputation coupled with a company tax rate of 50 per cent, would be: | 5.50 | 4.81 | 4.12 | 3.44 | 2.75 | 2.29 |
| 15. If the original profit of $200 were earned directly by an individual, the tax payable would be: | 40.00 | 60.00 | 80.00 | 100.00 | 120.00 | 133.33 |