Advanced Taxation For Potter Pty Limited

Discussion

Discuss about the Advanced Taxation for Potter Pty Liimited.

The Potter Pty limited is a privately owned company and was incorporated in the year 1980 and the industrial property of the company is owned in the metropolitan perth. The company has incurred revenue loss which was arisen from the renting properties owned by the company. However, the franked dividend is received from by the company from various other investments. The company declares different rate of dividends for the different classes of shares and all the shares of the company carries voting rights. Since the incorporation of the company the shareholders have remained the same (Hoggett et al. 2014). The company issues two type of shares that is shares of class A and class B. All the shares are equally held by the Peter but the shares of class A is also held by his children. All the capital of peter has been tied up in the company and Peter is to retire from the business and has a plan of purchasing the motor vehicle that is a motorhome and there is need to access the current or the ongoing value of the company (Petrovic et al. 2016). The valuation of the property of the company would be done in respect of four plans that is dividend, capital distribution. The purchase of motorhome by peter would be done by making the revaluation of the building at the market value and the financing of the motorhome purchase would include the loan taken from the bank and the funds raised through the revaluation of the property. It would also involve the sale of the shares of B class.

To,

Peter

Director

Potter Pty limited

Sub: Suggestion on the proposals to be accepted

Respected Sir,

The book value of the property held at cost that is the book value of the property is $ 250000. The market value of the property of the company stands at $ 850000. Here, the book value of the property held is less than the market value. This would mean that revaluing the property at market value would appraise the value of the property. The total amount of assets of the company would increase. The revaluation of the property would yield the taxable economic benefits to the Peter. This would results in an increase in the revaluation reserve of the assets. The valuation of the equity of owner would also increase. This would reduce the leverage and also the exit values of the assets or say the property would have credible signals. The revaluation of the property that is the building in the given case would also help in spreading the burden of tax. The revaluation would involve the inspection of the properties. The property tax of the company would increase if the operating cost of the company would remain the same. However if the properties are overvalued then the company would have smaller amount of tax to be paid after the revaluation. The market value is determined by the appraisal and forms from the basis of the accurate data and the evidence available.

The payment of fully franked dividends to all the shareholders of A class shares at the rate of $ 0.70 per share. The class A shares are equally held by peter, his wife and two children.

No of shares held by each individual= 25000

Share price= $ 1

Amount of investment made by each= $ 25000

Dividend rate= $ 0.70 per share

Dividend income= $0.70*25000= $ 17500

Franking credit= 750 * 30%= $ 7500

Taxable income= ($ 17500 + $ 7500)= $ 25000

The implication of the personal tax is that when the assets gets revalued then the gain after the revaluation is either transferred to the capital account of the company as reserves and this would increase the amount of deferred assets. This would also leads to the increase in the tax amount paid. When the franked dividend is paid to the asset shareholders of A class shares then there would be exemption from the tax by 30%. The amount exempted would be credit to the franking account and the credit side of the franking account would go up. The loan taken from the bank would increase the net income in the current year and the amount of tax paid also gets increased in the next year. The unfranked dividend does not have any tax exemption and since the dividend is paid after deducting the tax, the payment of such dividend does not have any impact on the tax obligation of the company. The franking account of the company gets increased.

The personal tax obligation gets increased if the individual receives the dividend as the total income available to them rises because of the increase of dividend.

The issuing of the dividend would reduce the net profit of the company as the value of equity would also go down because of the distribution of the dividends to the shareholders of the company. The franking dividend paid is debited to the franking accounts. Therefore, the issuing of the franked dividend would reduce the cash flow of the company and the net amount of fund available would go down. The balance of the franking account would also go down. The company has balance of $ 30000 Cr in the franking account and this would go down to $ 22500.

The existing amount of secured loan that the company has with bank is $ 200000. When the amount of bank loan would increase then the cash flow in the company would increase. The total liabilities side of the balance sheet of the company would increase and this would increase the shareholders stock of equity.

The unfranked dividend payment to the shareholders of class B shares and the unfranked dividend amount is $ 325000. Such unfranking credits are not attached with the issuance of the franking credits. This is a dividend that does not have any tax credits attached to it. When the company is paying the unfranked dividend on B shares then the company would not be able to pay the dividend on shares class of A and also the balance of the franking credits would remain unchanged. The payment of such dividends would reduce the capital as the flow of cash in the company would get reduced and this would have impact on the net profits of the company.

Therefore, the liabilities side of the company would get reduced as the reduced net profit would impact the stockholders equity. Peter is willing to buy the motorhome after the retirement and if the company is paying the unfranked dividends only to B class shares of which only the Peter is the shareholder that is the shares are solely owned by peter then he would be able to purchase the motorhome from the value of unfranked dividends.

The raising of the funds from the bank that is the loan borrowed from the bank of the amount of $ 350000 would increase the cash flow in the current year and the amount when used as a capital distribution then the impact would be that the value of the shareholders equity would increase and the company would be able to reduce the long term debt at the same time. The additional funding received from the borrowing by the bank would also provide a way of funding of the purchase of the motorhome by Peter. Since the amount of funds received from the extra loan borrowed by the company would be used in the distributing of the capital.

The company is paying the capital distribution of $ 350000 and so the franking account of the company gets unaffected as the capital distributed to the shares of class B and therefore there would not be any affect on the tax as shareholder would not get any tax exemption. However, the company is declaring the dividend to the shareholders; therefore, the burden of the tax of the company would not be reduced. The franking credit account of the company remains unchanged in this context as there is no franked dividend payment on the shares. The tax obligation of the company would not be reduced and the personal tax obligation would remain unchanged in case of capital distribution.

The revaluation of the building or say the property at the market value of the assets is positively related with the shareholders equity as the research conducted has been evidence of the fact that the revaluation of the building to the market value would have a positive impact on the price of the shares of the company. When the company decides to revalue the assets and the building in this case, the defaults on the debt payment get reduced. The financial performance of the company and the asset revaluation is positively related. When the assets is upwardly revalued as the market value of the building in the given case is more than the book value , the carrying amount of the assets get increased and the revalued amount is reported in the shareholders equity  as the amount under the section of the revaluation surplus. Therefore, the value of the shareholders gets increased and as a result of this, the return on equity gets reduced. The increment in the value of the assets and the equity reduces the leverage and though the profitability of the company in the future might not increase in the future years of operation.

Here, the revaluation of the property of the company at the market value would results in the gain to the company as the market value is much more that the book value of the assets. The gain due to the revaluation is always recognized as equity. The revaluation is being done on the assets of the company that is building  this case and therefore all the buildings in that class of assets needs to be revalued However, the gain from the revaluation o the assets is realized when the assets or the property is disposed. All the assets in the class of property that is the revaluation of the building would include all the immovable properties and the assets needs to be revalued in the fair terms so that there is not any material difference between the reporting value. When the noncurrent assets are revalued then there needs to be some adjustment in the accounts. The double entry that would be required to pass is that the cost of the noncurrent assets would get debited.

The accumulated depreciation amount would also get debited and the gain on the revaluation of the assets would be credited to the revaluation account. The account of the comprehensive income would gets credited if the revaluation results in the increase in the value of the buildings. However, the disposal of the revalued assets and the amount or the funds generated from the sale of such assets would be transferred to the account of retrained earning and it would also increase the valuation of the shareholders equity.

The profit and loss account does not have any role in the amount generated from the sale of the revalued assets and the same does not have any adjustments. The amount of surplus generated from the revaluation of the assets is mainly the difference between the depreciation that is based on the carrying amount that is revalued and the depreciation that is based on the carrying amount of depreciation based on the original costs of the assets. The income generated from the revaluation and the treatment of the taxes on such income are recognized and made in accordance with the international accounting standard of the income taxes.

The amount of loan that is borrowed from the bank by the company has increased and the company would give Peter the permission to purchase the motorhome using such extra amounts of funds only on the condition that all the operating costs incurred by the company would be borne personally by Peter. This condition is acting as a shield to the company which would protect it from running in the losses in the future. This is because if the loan amount taken from the bank would be used by peter for his personal expenses that is for the buying of the motor vehicle then this would reduce the flow of cash in the company and this might leads to the insufficient generation of cash to meet the short term obligations of the company.

Therefore, in the future in order to avoid the situation of running in the losses, the company wants Peter to act as guarantor to bear all the operating cost of the company. The operating expenses of the company are not directly related with its production activities and are concerned with its day to day operations. This includes the commission paid to salesman, rent, depreciation and the repair cost incurred by the company. These expenses are mainly attributable to the non manufacturing expenses of the company. The extra amount of debt taken by the company would increase the cash flow and increase the debt of the company and using the same for the personal expenses would reduce the liabilities side of the balance sheet but would be faced with the shortage of cash flow. The company’s operating cost would be met by Peter under which condition the extra amount of loan would be allowed by the company to be taken by him for the personal expenses.

With regard to the loan amount taken by Peter that is the director of the company is he might enter into the written loan agreement with the company and this should involve the written commitment about the repayment of the loan within the specified time period and would be paying the interest rate that is benchmarked. If the director does not agree to bear all the operating expenses of the company, and the company is determined to make the dividend payment then in the company records the amount of loan can be converted in to the dividend amounts. If the company makes sufficient credit available to its shareholders then the dividend paid can be converted into franked dividend.

When the company is using the funds for purchasing the motorhome then the assets side of the balance sheet gets increased and the company can take into account the amount of depreciation which would be deducted from the tax. As the assets sides of the company get increased, purchasing the motorhome would not have any tax implication on the Potter Pty Limited unless depreciation of the motorhome is accounted for.

If the company allows the Peter to use the funds from the banks on the condition of bearing all the operating costs of the company then the personal tax liability of Peter would be reduced as Peter being the shareholder of the company, bearing the expenses would provide him the fringe tax benefits.

The franking account of Potter Pty limited would remain unchanged as there is no payment of the unfranked dividend and hence no tax exemption so that there would be credit on the credit side of the franking account.

All the B class shares are held by the director of the company that is Peter and if the company intends to sell all such shares to peter children that are to Tabitha who already owns the shares in of Class A. The selling of the shares of the directors to the daughter Tabitha at the market value of $ 3.50 each. The selling of the B class shares held by the director of the company to his daughter would not have any impact on the net valuation of the company and it would remain same as it is non organizational transactions as the shares are getting transferred from one shareholder to another. The affect would only be that Tabitha would have higher proportion of the shares held by her and possessing the more numbers of shares would not change Tabitha‘s voting rights as class B shares does not carry any voting rights. Also, the shares are sold at the market value that is $ 3.50 per share and so the amount of dividend received by Tabitha would be more than those of Jemima and Samuel. This transaction would not impact the funding of the purchasing of the motorhome by peter.

Thanking you.

Recommendation and Conclusion:

The plan C proposed by the company involves the course of action that would be bets suitable for Peter when it comes to assess the funding of the purchase of the motorhome. This is so because the company is giving peter the option to bear all the operating expenses and there the proceeds from the loan advances made by the bank would be used for funding of the purchase of the motorhome. The revaluation gain arising from the property revaluation would increase the equity of the shareholders. However, if the director of the company does not agree to bear the operating expenses of the company in future then the company can look for some other alternatives to protect it from the shortages of cash flows. If the loan amount is entered after the month of April, then the agreement can be made after the lodgment o the return of the income tax of the company. The agreement would be entered in with the Peter, director of the company regarding the repayment of loan within the specified time period along with the interest rate that would be of the industrial benchmark. This would have impact the director in the way that it would not have any increment in the amount of tax payable.

Since the company has excess franking offsets during the last years, then there might not be sufficient credit available and therefore, the loan amount should not be converted to the dividends if the company is determined to make the payment of dividends. Therefore, the plan C would be appropriate when considering the funding of the purchase of the motorhome by peter.

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