We want to pay dividends, but are we walking into a big tax bill?

Dear Aunty B,

We are in the happy situation of looking like we are going to make a profit – and a big profit – for the first time in our four-year history! I was going to recommend to my board that we pay a dividend this year when someone pointed out that we can’t pay franked dividends because we haven’t paid company tax yet and the dividends will attract a tax bill.

And I don’t want any more tax bills!

Can you explain this for me?

Yours,

Happy, then not so happy

Dear Happy, then not so happy,

I hate being the bearer of bad news, but here goes.

I gather you have had losses for the past four years.

That means because you have not paid any tax, any dividend declared would be unfranked.

As accountant Marc Peskett explains, that means the dividends will not have any credits attached to them for company tax paid by your company.

So when you receive the dividend you will have to pay tax on them at your personal marginal tax rate.

If you are paying yourself what you should be that means you, my friend, will be paying at the maximum personal tax rate of 46.5%.

I am not sure how far your tax losses will take you and when you will be due to pay company tax but you may want to look at holding off on dividends until then.

Be smart,

Your Aunty B