Tax issues for consideration
The following table provides a list of tax issues requiring assurance in relation to income derived by a Top 500 group from investments in shares in listed companies. The table also provides examples of processes and procedures that could be developed by a Top 500 group to show that they have effective tax governance in place to manage each tax issue.
Tax issue |
Tax assurance considerations |
Tax governance considerations |
---|---|---|
Record keeping – source documents |
Good record keeping supports the ATO’s ability to assure that Top 500 groups are paying, and will continue to pay, the correct amount of tax. Record keeping is also a requirement for under Division 121 and section 262A. |
The tax governance policy of the group should include procedures for:
|
Completeness of dividend income disclosures |
Has all dividend income from listed shares been identified and disclosed in the entity’s tax returns? |
The tax governance policy of the group should include procedures for:
|
Dividend income is reported in the correct period |
Has dividend income from listed share investments been reported in the correct income year? |
The tax governance policy of the group should include procedures for:
|
Franking credits are correctly reported |
Have franking credits attached to dividends from listed shares been correctly reflected in the recipient entity’s tax returns? |
The tax governance policy of the group should include procedures for:
|
Characterisation and calculation of capital gains and losses on the disposal of investments in listed shares. |
Has the vendor entity correctly characterised and reported gains and losses on the sale of investments in listed shares? |
The tax governance policy of the group should include procedures for:
|
Correct reporting |
Has the entity who derived the dividend income or who made the capital gain or loss, reported correctly in their tax return? |
The tax governance policy of the group should include procedures for ensuring that dividend and capital gains tax information is migrated across from the working papers and correctly disclosed in the relevant entity’s tax return. |
Governance framework example
To help in developing a written tax governance framework, we have prepared 2 examples that could be used to develop checklists that may help in managing dividend income as required under principle 2 of the 7 principles of effective tax governance
Passive investors with simple affairs – checklist
Group head: Mr John Simple
Entity name: Mr John Simple
Checklist: Dividend income and capital gains/losses
Year end: 30 June 2022
Item |
Activity |
Responsibility |
Purpose |
---|---|---|---|
1 |
The John Simple group shall maintain a central repository for documentation concerning:
Acquisitions (including acquisition of shares through a DRP or similar) and disposals of listed share investments including dates, number of shares acquired or sold, prices, and brokerage fees, should be recorded in the Excel spreadsheet entitled 'Share Investment Register' within 3 days of the date of acquisition or sale. |
Bill Bookkeeper |
Good record keeping practices over all of Mr Simple’s investments in listed shares. |
2 |
At the end of each month back up electronic copies of documentation in the central repository and the share investment register to a plug-in hard drive, or memory stick. |
Bill Bookkeeper |
Ensure records of Mr Simple’s investments in listed shares are not lost in the event primary information sources are compromised. |
Item |
Activity |
Responsibility |
Purpose |
---|---|---|---|
3 |
Share registries are to be notified of Mr Simple’s TFN and custodians are provided with details of the bank account through which Mr Simple finances his investments. |
Bill Bookkeeper |
Remove TFN withholding risk. Ensure cash dividends are received into the correct bank account. |
4 |
The timing and amount of the dividend (including franking credits and dividends re-invested through a DRP) paid on each listed share investment held by Mr Simple should be recorded in the Excel spreadsheet entitled 'Share Investment Register', within 3 days of dividend statements being received. Accumulated totals should be maintained within the spreadsheet. |
Bill Bookkeeper |
Ensuring Mr Simple’s dividend income disclosure is complete and referable to the correct year of income. |
5 |
The “Share Investment Register” is updated to include additional shares issued as part of Mr Simple’s choice to participate in a DRP. |
Bill Bookkeeper |
Ensuring new shares issued as part of a DRP are recorded as an asset acquired by Mr Simple. |
6 |
Reconcile cash dividend payments deposited to Mr Simple’s investments bank account with dividend statements. |
Bill Bookkeeper |
Helping ensure Mr Simple’s dividend income disclosure is complete. |
7 |
Before forwarding information to tax agent, review spreadsheet to sense-check listed share investments held against dividend statements received to verify that dividends and franking credits have been captured and correctly recorded as expected. |
Bill Bookkeeper |
Helping ensure that Mr Simple’s dividend income disclosure is complete. |
8 |
At least 4 weeks prior to the due date for lodgment of Mr Simple’s tax return, provide Mr Simple’s tax agent with:
|
Bill Bookkeeper |
Helping ensure that Mr Simple’s tax return is lodged on time. Helping the tax agent with the process of preparing Mr Simple’s tax return. |
Item |
Activity |
Responsibility |
Purpose |
---|---|---|---|
9 |
Tax agent to provide an annual engagement letter to Mr Simple that specifies the tax agents and Mr Simple’s responsibilities under the engagement. |
TAG & Mr Simple |
To provide clarity around:
|
Item |
Activity |
Responsibility |
Purpose |
---|---|---|---|
10 |
Logic check dividend income and franking credit calculations in Mr Simple’s Share Investment Register spreadsheet. |
Tax agent |
Integrity check over primary data source from which dividend income information is obtained. |
11 |
Verify that Mr Simple’s franking credit entitlements satisfy the 45 day holding period rule |
Tax agent |
Confirm Mr Simple’s eligibility to claim franking credits. |
12 |
Calculate capital gains and losses on the disposal of listed share investments that occurred during the year. As a competent professional Mr Simple’s tax agent is across the method statement in s102-5 and the issues that are relevant to the correct calculation of gains and losses arising from the disposal of investments in listed shares. |
Tax agent |
Correct calculation of capital (or revenue) gains and losses made by Mr Simple during the income year. |
13 |
Retain and file working papers |
Tax agent |
Retention of records that support tax return disclosures. |
Item |
Activity |
Responsibility |
Purpose |
---|---|---|---|
14 |
Dividend income and franking credits derived by Mr Simple during the year are migrated across from the Share Investment Register spreadsheet across to Mr Simple’s income tax return. |
Tax agent |
Correctly capture dividend income in Mr Simple’s tax return. |
15 |
Dividend income totals in Mr Simple’s final return are checked back to the Share Investment Register spreadsheet. |
Tax agent |
Ensure calculations align with information included in the tax return. |
16 |
Capital gains tax calculations carried out by the tax agent are migrated from the tax agent’s working papers across to Mr Simple’s tax return and accompanying schedules. |
Tax agent |
Ensure capital gains and losses are correctly reported. |
17 |
Verify that the correct amount of franking credit offsets are included in the calculation of Mr Simple’s tax payable. |
Tax agent |
Helps ensure that the calculation of tax payable by Mr Simple is correct. |
Passive investors with complex affairs – checklist
Group head: Ms Joan Complex
Entity name: Complex Investments Pty Ltd (Complex Co)
Checklist: Dividend income and capital gains/losses
Year end: 30 June 2022
Item |
Activity |
Responsibility |
Purpose |
---|---|---|---|
1 |
Complex Co shall maintain a central database repository for documentation concerning:
Information is to be captured in Complex Co’s tailored investment management software package. |
Investment Management team |
Good record keeping practices over the source documents that record Complex Co’s direct investments in listed shares. |
2 |
Complex Co will record acquisitions (including acquisition of shares through a DRP or similar) and disposals of listed share investments including:
|
Investment Management team |
Good record keeping practices over the ongoing management of Complex Co’s portfolio of direct investments in listed shares. |
3 |
Summary transactional information captured in the management software is migrated to Finance Department’s accounting software each day. |
Investment Management team/Finance team |
Ensures transactional activities of the investment management team can be reconciled to bank and integrated into Complex Co’s daily P&L and Balance Sheet. |
4 |
At the end of each week back up in the management software files to Complex Co’s cloud repository. |
Investment Management team |
Ensure records of Complex Co’s investments in listed shares are not lost in the event primary information sources are compromised. |
Item |
Activity |
Responsibility |
Purpose |
---|---|---|---|
5 |
Share registries are notified of Complex Co’s TFN and provided with its bank account details. |
Investment Management team |
Remove TFN withholding risk. Ensure cash dividends are received into the correct bank account. |
6 |
The timing and amount of the dividend (including franking credits and dividends re-invested through a DRP) paid on each listed share investment held by Complex Co should be recorded in the management software on the same day as dividend statements being received. |
Investment Management team |
Ensuring Complex Co’s dividend income disclosure is complete and referable to the correct year of income. |
7 |
Dividend information captured in the management software is migrated to Complex Co’s Finance Department’s accounting software each day. |
Investment Management team/Finance team |
Ensures dividends received can be reconciled to bank and integrated into Complex Co’s daily P&L. |
8 |
The management software is updated to include additional shares issued as part of participation in a DRP. |
Investment Management team |
Ensuring new shares issued as part of a DRP are recorded as an asset. |
9 |
Reconcile cash dividend payments deposited to Complex Co’s bank account with dividend statements. |
Financial accounting team |
Helping ensure Complex Co’s dividend income disclosure is complete |
10 |
Dividend information is analysed to verify whether Complex Co satisfies the 45 day holding period rule in relation to the franking credits attached to each dividend that has been paid to it. The balance of Complex Co’s franking credit entitlements are to be maintained on an on-going basis with the annual total included as a preparatory note to the tax return working file. This is to ensure that franking credits are recognised (added back) in Complex Co’s tax reconciliation and final tax calculation. |
In-house tax accountant |
Helping ensure that Complex Co’s franking credit entitlements are accurate and correctly disclosed. |
11 |
Franking account to be maintained |
In-house tax accountant |
Assign accountability for ensuring that Complex Co’s franking account is accurate and correctly disclosed. |
12 |
At year-end dividend information is analysed to identify any final dividend entitlements that have been declared but which remain unpaid. Any differences are included as a preparatory note to the tax return working file to ensure that they are recognised in Complex Co’s tax reconciliation. |
In-house tax accountant |
To help ensure that timing differences are taken into account when income is recognised for accounting and tax. |
Item |
Activity |
Responsibility |
Purpose |
---|---|---|---|
13 |
Extract trading information from the management software and:
Complex Co’s in-house tax accountant should have the capability to carry out capital gains tax calculations for disposals of listed shares and to apply the method statement in s102-5. Where required the in-house tax accountant will refer complex issues across to Complex Co’s tax agent/advisors. |
In-house tax accountant |
Adjustments for accounting gains and losses are captured on the tax reconciliation. Correct calculation of capital (or revenue) gains and losses. |
Item |
Activity |
Responsibility |
Purpose |
---|---|---|---|
14 |
Tax agent to provide an annual engagement letter to Complex Group that specifies the tax agents and Complex Co’s responsibilities under the Complex Co tax return preparation engagement. |
TAG & Complex Co’s group CFO |
To provide clarity around:
|
Item |
Activity |
Responsibility |
Purpose |
---|---|---|---|
15 |
At least 4 weeks prior to the due date for lodgment of Complex Co’s tax return, the Financial Controller will need to provide their tax agent with:
|
Financial Controller supported by in-house tax accountant |
Helping ensure Complex Co’s tax return is lodged on time. Helping the tax agent with the process of preparing Complex Co’s tax return. |
Item |
Activity |
Responsibility |
Purpose |
---|---|---|---|
16 |
Review Complex Co’s dividend income, franking credit, and capital gains tax working papers and draft calculations. Make inquires of Complex Co as required and adjust calculations as necessary. |
Tax agent |
Integrity check over primary data source from which dividend income information for Complex Co is obtained. |
17 |
Reconcile calculations back to Complex Co’s trial balance. |
Tax agent |
Integrity check over primary data source from which dividend income information for Complex Co is obtained. |
18 |
Prepare Complex Co’s tax reconciliation including taking steps to:
|
Tax agent |
Given that the tax reconciliation is a working paper that is central to the tax return preparation process for Complex Co it's important that accounting and tax differences are correctly captured and that the source of each adjustment is traceable. |
19 |
Migrate dividend income total from the working papers to Complex Co’s income tax return. |
Tax agent |
Correctly capture dividend income in Complex Co’s return. |
20 |
Prepare capital gains tax schedule and migrate net capital gain figure across to income tax return. |
Tax agent |
Ensure capital gains and losses are correctly reported in Complex Co’s return. |
21 |
Verify that the correct amount of franking credit offsets are included in the calculation of Complex Co’s tax payable. |
Tax agent |
Ensure calculation of Complex Co’s tax payable is correct. |
22 |
Retain and file Complex Co’s tax return working papers |
Tax agent |
Retention of records that show how Complex Co’s tax return disclosures and tax payable have been determined. |