How to retire early... or simply survive

[McLovin]

A company is an ownership structure.

They are owned by shareholders, so should only be taxed at the tax rate of the share owner when passed through to the shareholder when a dividend is paid.

No. A company is a legal person. It's far more than an ownership structure. When it makes a profit or buys an asset, it belongs to the company, not to the shareholder. No liability to shareholders exists for accumulated profits until a dividend is declared. If the argument that it is nothing more than an ownership structure had any weight, then the company's profits should be taxed at the shareholder's tax rate regardless of whether they are paid out as a dividend, in the way a unit trust is taxed.

 

[willy1111]

A

No. A company is a legal person. It's far more than an ownership structure. When it makes a profit or buys an asset, it belongs to the company, not to the shareholder. No liability to shareholders exists for accumulated profits until a dividend is declared. If the argument that it is nothing more than an ownership structure had any weight, then the company's profits should be taxed at the shareholder's tax rate regardless of whether they are paid out as a dividend, in the way a unit trust is taxed.

A Company is not a person.

It is a separate legal entity, at its core created as an ownership structure for the BENEFIT of the owners/shareholders and has the advantage of limited liability etc, etc.

When the company sells the asset/makes a profit or the company is wound up, who does the money ultimately go to. The shareholders/owners at the discretion of the directors who are elected by the shareholders/owners.

A trust is another ownership structure, the trustee controls the asset/business for the benefit of the owner.

 

[SirRumpole]

When the company sells the asset/makes a profit or the company is wound up, who does the money ultimately go to.

What about shares that have been bought back by the company ? How can they be returned to people who no longer own them if the company is wound up ?

 

[McLovin]

A

A Company is not a person.

legal person
Legal person refers to a non-human entity that is treated as a person for limited legal purposes--corporations, for example. Legal persons can sue and be sued, own property, and enter into contracts. In most countries, legal persons cannot vote, marry, or hold public office. Most countries also excluse legal persons from holding natural or constitutional rights, such as the freedom of speech.

 

[willy1111]

What about shares that have been bought back by the company ? How can they be returned to people who no longer own them if the company is wound up ?

Ummm...shares can't be bought back from a company that has been wound up. Once wound up, thats it it's finished.

If a company was to be wound up, all the assets would be sold/turned into cash and then remaining cash distributed to share holders as return of capital creating a capital gain for shareholders. Or it might be paid as dividends.

 

[willy1111]

S

legal person
Legal person refers to a non-human entity that is treated as a person for limited legal purposes--corporations, for example. Legal persons can sue and be sued, own property, and enter into contracts. In most countries, legal persons cannot vote, marry, or hold public office. Most countries also excluse legal persons from holding natural or constitutional rights, such as the freedom of speech.

Good technical definition...personally I prefer to refer to it as entity as it can't do anything on its own, it has to be controlled by a real natural person to do any of the things you describe.

 

[willy1111]

If the argument that it is nothing more than an ownership structure had any weight, then the company's profits should be taxed at the shareholder's tax rate regardless of whether they are paid out as a dividend, in the way a unit trust is taxed.

With a 100% payout ratio that is exactly what would happen.

It would be a further administrative burden on the company to apply individual tax rates to each shareholder, much easier to apply a flat rate of tax, less call it company tax.

Apply no witholding to the dividend and let the ato sort it out when individual returns are lodged...how many would say they didn't have the cash to pay the tax bill. So how about we get the company to withold some, same as we do with employees and payg instalments. Exactly what company tax does now.

With 100% payout ratio, the company doesn't have any retained earnings to grow/invest in the business, so they could do a capital raising.

I like the system the way it is and think it is much fairer than the proposals.

The tax free pensions for those over 60 is what I believe needs addressing, that could be 20-50 years of income untaxed. Which is probably the ones going to be most hit by the proposals, but why not go after it directly rather than indirectly.

 

[McLovin]

S


Good technical definition...personally I prefer to refer to it as entity as it can't do anything on its own, it has to be controlled by a real natural person to do any of the things you describe.

It's not a definition it's a real legal concept that's been in use for the better part of 200 years. The whole principle of limited liability flows from it. It's the difference between prosaic discussions on the internet and the real world.

 

[willy1111]

It's not a definition it's a real legal concept that's been in use for the better part of 200 years. The whole principle of limited liability flows from it. It's the difference between prosaic discussions on the internet and the real world.

It was always referred to as entity rather than person when I studied it at Uni.

I understand that limited liability is a major benefit of company structures but it is for the benefit of limiting liability of the shareholder's/owners of the company which comes back to my point that companies are an ownership structure for the benefit of the shareholders/owners.

 

[Junior]

The tax free pensions for those over 60 is what I believe needs addressing, that could be 20-50 years of income untaxed. Which is probably the ones going to be most hit by the proposals, but why not go after it directly rather than indirectly.

Agree with this. Should have done this instead of the $1.6mill cap which has just added more complexity to the system.

 

[SirRumpole]

Agree with this. Should have done this instead of the $1.6mill cap which has just added more complexity to the system.

Imagine the outrage if Labor tried this though ? It already a national disaster that they want to claw back a few refunds from the mostly well heeled, if they proposed taxing super the media outcry would be heard on the moon.

 

[McLovin]

It was always referred to as entity rather than person when I studied it at Uni.

I understand that limited liability is a major benefit of company structures but it is for the benefit of limiting liability of the shareholder's/owners of the company which comes back to my point that companies are an ownership structure for the benefit of the shareholders/owners.

It doesn't matter what you call it – company, corporation, enterprise, concern – it's a legal person in the eyes of the law. That is a legal concept that can extended to all sorts of structures.

The assets and liabilities of the company are owned by the company, not shareholders. Company tax on profits is a liability that falls on the company, not shareholders. If the intent was to create look-through taxation to the shareholder, which seems to form the basis of what's being argued, then profits would be distributed, regardless of whether cash is paid out, and there would be no need for company tax at all.

The imputation system was created to prevent double taxation, not to prevent taxation.

 

[Value Hunter]

Like I said before I'll take Labour's argument seriously when they eliminate their fat cat political pensions, which in other words is never.

We need to encourage people to be financially self sufficient in old age. If we keep attacking the super system (which the proposed reform does in an indirect way) people are less likely to save for retirement and more likely to rely on the government aged pension, thereby negating the impacts of any potential extra tax revenue raised. Most young people already have no confidence in the super system and refuse to make extra voluntary contributions to their super because they expect continual government tampering. This latest labour proposal further undermines confidence in the superannuation system as well as undermining confidence in capital markets and the economy more generally.

Besides Australia's problem does not stem from a lack of tax revenue (there is more than enough tax revenue), rather it stems from waste, corruption and overspending. We need to slash government spending rather than choking the economy by imposing even more taxes on an already highly taxed society.

 

[SirRumpole]

If we keep attacking the super system (which the proposed reform does in an indirect way) people are less likely to save for retirement and more likely to rely on the government aged pension,

Living in poverty on the aged pension ? I don't think that is attractive to most people.

 

[luutzu]

...And companies shouldn't pay tax because...

"jobs"

 

[luutzu]

Actually McLovin I am not only opposed to company tax I am opposed to all income taxes. I think profits, wages, etc should not be taxed. Why tax productivity? If you tax something you tend to get less of it, tax income and you will get less of it being generated.

Assuming for a minute that any form of tax should exist in the first place (we will leave aside the anarachy debate for now), if you increase land taxes (put up the land tax on the unimproved value of land) you will get less property speculation and if you increase consumption taxes (e.g. put up the GST to 20%) people might consume less. If people consume less they will save more, higher savings in the long term leads to higher production and higher growth and then flowing from that higher consumption.

Why punish people for being industrious and generating more income?

Taxing productivity, profit is not a punishment. It's getting a share of the profit society made possible.

Who train the workforce that are readily available to work for the company? Who make laws, have courts to settle dispute; built infrastructure and utilities; have defences, the police and Big Brother watching and securing the goods etc. etc.

So unless the entrepreneurs and capitalist exists and create all that wealth by themselves... paying tax from profit is not a punishment, but protection money.

To raise tax on consumption but lessen tax on "investment"/speculation... that's just class warfare.
Rich or poor, most people need to spend on the essentials. Most can't eat more than 3 full meals a day; can't drink more water or use that much more power or fuel...

So when consumptions are taxed, they tax the poor and working class - those that have very little, if any, left after paying off their essential consumption... tax those a lot more than taxing the well to do.

And if you think about it, taxing consumption is to depress spending. And it is spending that stimulate investment.

Savings and investment capital without much demand will inflate asset prices and lead to financial speculation and bubbles.

That's unless we reckon all investable savings/capital goes towards the Elon Musks and other adventures to save humanity. Even then, that's still speculation.

Proper investment, ones with a greater chance of real return, ones that create real value for both the investor and the consumer... such investment are found in businesses that create/produce goods and services that are in demand.

 

[Value Collector]

Okay I do see your point that at a certain level, income doesn't need tax relief. Introducing thresholds would work do you think?

But why would you only target dividends?

 

[Value Collector]

How about:
3, Company pays $18,000 as dividend with $0 franking credit = $18,000

That would mean you would have to abolish the company tax, and only tax dividends, I wouldn't be for that either, It would be good for me, because I could compound earnings inside a company tax free until the day I wanted to pay myself a dividend, but I don't think that is good.

 

[Value Collector]

- Corporate profits are taxed at 30%

Thats the rate that should apply to profits being retained by the company and reinvested/compounded inside the company.

thats fine.

- Individual tax rates operate in tax brackets, plus medicare levy, less tax offsets in some instances

Thats the rate that should be applied to company profits paid out to shareholders, eg the larger share holders pay more tax than the smaller ones, and the smallest shareholders pay no tax if their share of profits paid out is under the $18,000 mark, just like every other source of income.

putting the dividend income into the tax brackets without allowing franking credits, causes the small share holders who should be tax free to be charged 30%, and the larger ones to be charged 70%.

If you wanted to get rid of franking credits you would have to have a lower tax rate for dividends, not add them to the tax brackets.

- Super in accumulation is taxed at 15%

Yep, thats the rate that is charged to earnings inside super, so they get a refund of half their franking credits, reducing the tax on the company profits paid to them to the 15%.

(If they don't get the refund their tax will be 40.5% on company earnings, vs 15% for their friend invested in property or bonds)

- Super in pension phase, taxed at 0%

Yep, you can change that is you want, I would be happy to have thresholds in their bringing it up to a maximum of say 15% tax, for people with really high balances.

- Trust income; distributed to beneficiaries and taxed based on the individual or entities tax rate

Yep thats all good

My point is, your persistent argument that all income is the same and is all taxed at a personal level is simply not based on how our tax system works. It's more complicated than that, as you know.

No, your argument is that different tax rates should apply to investors depending on whether their earnings come from Property, bonds or shares in a company.

This is unique to Australia and is not generally how company tax is treated in the majority of jurisdictions.

Other countries use lower tax rates for dividends to get around the problem, eg USA taxes dividends at 15% fixed rate, because they recognise its double dipping,

A 15% flat tax on dividends would limit taxes on company profits to about the top marginal tax rate, which is fine for the large share holders, how ever charging the smaller share holders at the top marginal tax rate isn't fair in my opinion, especially when other sources of income get the tax free threshold.

 

[Value Collector]

not to make it possible for companies to pay no tax on a portion of their profits, which the current system in effect does.

How does it do that?