Introduction to Corporate Finance

PArT 1: INTrODuCTION

Australian real property (TARP). Broadly, TARP will include Australian real property as well as certain

indirect interests in Australian real property. The Australian tax system provides taxation relief against

international double taxation by granting foreign tax offsets in some circumstances, and in others, by

exempting the foreign income from Australian tax.

The corporate income tax rate applies to income earned during the period from 1 July to 30 June of the

following year. If a company has approval to use a different year-end for tax purposes, the approved period

must still relate to a 30 June year-end (that is, the year ended 30 June 2015 in lieu of 30 June 2016).

Not all countries operate with identical corporate income tax rates. A website such as that offered by

KPMG (http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.

aspx) gives an indication of the variety that exists across nations. Some countries, such as the US, also have

different corporate income tax rates for different levels of income, with higher rates on higher corporate

incomes. This is called a progressive tax regime. The Australian model is a flat tax regime for companies.

Average Tax rate

A useful measure is the company’s average tax rate, which is calculated by dividing its tax liability by its pre-

tax income. For example, if the tax that a company expected to pay in the coming year was $952,000, and its

pre-tax income was $2,800,000, then the average tax rate would be exactly 34% ($952,000 ÷ $2,800,000).

This company would expect to pay an average of 34 cents on each dollar of pre-tax income earned.

2-4b COrPOrATE CAPITAL GAINS

Companies experience capital gains when they sell capital assets, such as equipment or shares held as an

investment, for more than their original purchase price. The amount of the capital gain is equal to the

difference between the sale price and initial purchase price. If the sale price is less than the asset’s book,

or accounting, value, the difference is called a capital loss. Under current tax law, corporate capital gains

are merely added to operating income and taxed at the ordinary corporate tax rates. The tax treatment of

capital losses on depreciable business assets involves a deduction from pre-tax ordinary income, whereas

any other capital losses must be used to offset capital gains. The following example demonstrates the tax

treatment of a capital gain.

average tax rate
A company’s tax liability
divided by its pre-tax income

capital gain
The difference between the
sale price and the initial
purchase price of a capital
asset, such as equipment or
shares held as an investment

capital loss
The loss resulting from the
sale of a capital asset, such
as equipment or shares held
as an investment, at a price
below its book, or accounting,
value

Assume that a company decided to sell an entire

production line for $850,000. If the company had

originally purchased the line two years earlier for

$700,000, how much in capital gain taxes would

the company owe on this transaction if it were in

the 30% corporate income tax bracket on ordinary

corporate income? The company would have

realised a $150,000 ($850,000 – $700,000) capital

gain on this transaction, which would result in

$45,000 ($150,000 × 0.30) of taxes.

example

CONCEPT REVIEW QUESTIONS 2-4

12 How are Australian-resident companies taxed on ordinary income?

13 What are corporate capital gains and capital losses? How are they treated for tax purposes?