Retained Profits and Adjustments for Non-Allowable Deductions

Retained profits

If the entity retains a portion of the profits, the portion retained by the entity (subject to the percentage of the entity attributed to the stakeholder) is to be added to the actual amount received by the attributable stakeholder and deducted from the attributable amount. The balance is treated as a gift by the attributable stakeholder. Retained profits from previous years' trading paid to attributable stakeholders (only) are disregarded when assessing the income of the attributable stakeholder.

Example of retained profits

Company C has 2 attributable stakeholders. Tom is attributed with 50% and Jerry with 50% of the assets and income of the structure. Jerry is in receipt of Income Support Pension. The annual tax return indicates that the company recorded an (adjusted net) profit of $20,000 in the previous financial year. Tom received $10,000, Jerry received $5,000 and the company retained profits of $5,000.

Jerry was entitled to $7,500 (50%) of the distributed profits of the company. He received $5,000. As Jerry has received less than his fair share of the distributed profits of the company, deprivation has occurred. Jerry's deprivation amount is $2,500 (fair share of $7,500 less $5,000 actually received). Tom did not deprive himself of any income. His fair share of distributions was also $7,500, however he received actual distributions of $10,000.

Making adjustments for any non-allowable deduction

Where a company profit-&-loss statement is adjusted to remove non-allowable deductions, the attribution amounts calculated for the attributable stakeholders in the company will vary from the actual amounts paid. In such instances, look at the proportions in which the actual income was paid as represented on the income tax return. If these proportions reflect the attribution of income as assessed, the issue of gifting and deprivation does not arise.

Example of considering non-allowable deductions

Barry and Jack are the attributable stakeholders of a private company. Barry is attributed with 75% and Jack is attributed with 25% of the assets and income of the entity. Barry is in receipt of income support pension. The adjusted net profit of the company for the last financial year was $40,000 (arrived at in the assessment following the removal of $10,000 in non-allowable deductions from the profit-&-loss statement). The amount available for distribution from the income tax return is therefore $30,000 (non-adjusted net profit). Barry received $22,500 (75% of the non-adjusted net profit) and Jack received $7,500 (25% of the non-adjusted net profit). As the pensioners have received income in the proportions attributed to them, the question of gifting and deprivation does not arise. Following the appropriate adjustments to the profit-&-loss statement, Barry's assessable income comes to $30,000 (75% of $40,000) and Jack's assessable income comes to $10,000 (25% of 40,000).