Under the “classical” system of company tax that operated from 1940, a company was taxed as a separate legal entity and individual shareholders were taxed on dividends received without any recognition of the tax paid by the company on the profits out of which the dividends were paid. An inter-corporate rebate, however, usually effectively freed from tax dividends received by a corporate shareholder. An associated measure, to prevent private or closely held companies being used as tax shelters, imposed what was called “undistributed profits tax” on such companies if they failed to distribute at least a prescribed amount of their after-tax income.
The classical system of company tax was replaced in 1987 by an imputation system of company tax. The imputation system eliminated the “double taxation” of company profits that existed under the classical system. In very broad terms, this is achieved by imputing company tax levied on resident companies to resident shareholders who are paid a dividend. Dividends received are, as previously, included in a shareholder’s assessable income, but the amount of imputed company tax is also included in assessable income with the shareholder being entitled to a tax credit for an equivalent amount (¶4-400). Certain taxpayers are entitled to a refund of any excess imputation credits (¶4-820).
The rules governing corporate earnings should be compared with those for partnerships and trust estates. A partnership is not taxed as such, but the partners are taxed individually on their shares of the net partnership income (whether distributed or not); alternatively, a partner may claim as a deduction his/her share of the partnership loss (¶5-000). The net income of trust estates is taxed to the beneficiaries who are presently entitled to the net income (and who are not under a legal disability). Any income not taxed to the beneficiaries is taxed to the trustee instead (¶6-000).