Private companies need a capital management strategy too

Recently, a range of inquiries had been received regarding investments in some of Australia’s largest listed companies, who had been featured in the press lately on their policy on special dividends and capital distributions.

It is important to note that private companies should develop their own capital management strategy, for both the short and long term, especially when the Government is promising advantageous fiscal policies, such as the 1.5% cut in company tax rate starting 1 July 2015.

We would like to bring to your attention about the ATO’s dividend imputation system, whereby the payments of income tax would generate franking credits, and this can be used to “frank” dividends paid to shareholders.

Why not schedule a discussion with your accountant to start planning on several post-1 July 2015-scenarios. Do not forget to ascertain where you might be able to reduce the value of flow-through franking benefits to shareholders as it depends on the shareholders’ circumstances that determine their level of tax payable.

From another perspective, if a share capital distribution is carefully executed, the shareholders could benefit by not having the returns treated as frankable dividend, nor assessable. However, be aware that capital distributions may have other tax effects.

Hence, company directors are advised to take into account the diverse possibilities when planning capital distribution. Always keep in mind that, the more complicated the strategy, the longer it might take for tax advisers to liaise with the ATO, and negotiate for a private binding ruling that provides assurance to both the company and its shareholders.

Private companies need a capital management strategy too