For shareholders who own the company and who are entitled to the profits, you pay a dividend which is a payment of prior year profits to the shareholders. If the dividend is franked, which means the company has paid tax on that amount, the shareholder will receive a franking credit so that they don’t pay tax on the full amount.
If you pay a $100,000 dividend, that would have a 26% or a 30% franking credit, which is the company’s tax rate that it’s already been paid on. The person receiving that money would be assessed on the tax again, less the credit. So they might pay 40% tax that might be their rate, less the 30% credit so they only pay a top-up tax of that 10% difference.
The third way to take money out of a trust is to pay a distribution. The difference between a dividend and a distribution is, a distribution is current year profits. The company earning $100,000, paying $30,000 in tax and paying the dividend out afterwards in the following financial year. If a trust earns $100,000, it has to distribute that money in that financial year. And that’s what we call distributing the current year profits. Otherwise, we get that 47% tax rate that nobody wants.
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