The management of corporate exposure to capital gains tax

MacDonald, J. Charles A. (1988) The management of corporate exposure to capital gains tax The University of Queensland:

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Author MacDonald, J. Charles A.
Title of report The management of corporate exposure to capital gains tax
Formatted title

Publication date 1988
Place of publication The University of Queensland
Total pages 135
Language eng
Subjects 1503 Business and Management
Formatted abstract
The objective of this research paper is to develop guidelines for managing the capital gains tax exposure of corporations. Capital Gains tax is pervasive and over time will impact of most activities undertaken by corporations.

Management efforts to keep an organisation properly aligned with changes taking place in the business environment may result in the acquisition and divestment of corporations, business units at a macro level and the acquisition and disposal of specific assets at the micro level. Capital gains tax consequences more often than not will arise from these activities and will effect shareholder wealth whether the company or the shareholders pay the capital gains tax directly.

Awareness of the exposure of the corporation to capital gains tax is important to financial management. The payment of' tax effects the cash flows of a company, and shareholder wealth is the maximisation of after tax cash flows. This paper reviews the capital gains tax legislation as it effects corporations and is broken into six sections: a review of the basics of capital gains tax; capital gains tax implications of the ownership structure of corporations including the debt equity financing decision; the impact of capital gains tax on certain operating activities; takeover and restructuring consequences; and lastly, the impact of capital gains tax on corporate dividend decisions.

In respect of corporate dividend decisions, computer simulation models based on the current Australian taxation system have been developed showing the impact on shareholder consumption income when the following factors are varied: income tax (including capital gains) tax rate, corporate tax, different dividend payout policies, and lastly, interest on corporate versus personal debt.

Finally, guidelines for management consideration when dealing with a corporation's exposure to capital gains tax are developed. As a point of warning the guidelines should not be used in substitution for a proper reading of Part IIIA when dealing with real life situations. As will be seen in the following discussion, Part IIIA is complex, often difficult to understand and in some parts shrouded in mystery. In real life situations, the legislation has to be interpreted as it applies to the unique facts effecting a company at a particular point in time. Legal advice may often be necessary.

However, it is hoped that the guidelines will be useful for management understanding of the potential CGT pitfalls to be avoided and ways to minimise the impact of the legislation on the corporation and shareholders.

Document type: Research Report
Collection: MBA reports
Citation counts: Google Scholar Search Google Scholar
Created: Wed, 22 Dec 2010, 18:37:41 EST by Ning Jing on behalf of The University of Queensland Library