Keep calm and 'carry on' - unless you are a passive investment company

19 September 2017

The Government has released draft tax legislation for consultation to clarify that passive investment companies cannot access the lower company tax rate for small businesses, which has been an area of uncertainty. The exposure draft bill amends the tax law to ensure that a company will not qualify for the lower company tax rate if 80% or more of its income is of a passive nature (such as dividends and interest).

Mark Molesworth, Tax Partner at BDO said: “The rules have been changed so that as soon as 80% of a company’s income comes from ‘passive’ sources, it cannot use the lower tax rate, irrespective of its aggregated turnover. Passive income includes dividends, interest, royalties and partnership and trust distributions attributable to passive sources.”

“Therefore corporate beneficiaries of trusts that carry on an active business can take advantage of the lower tax rate. A similar tracing approach applies to dividends received from companies in which a shareholding of at least 10% is held. This is an unexpected, but welcome, outcome.”

“The amendments only apply to the year ended 30 June 2017 and later years. The government appears to have abandoned any amendment in relation to the 2016 year where the 28.5% rate applied to companies with an aggregated turnover of less than $2 million. Therefore companies with passive income in that year, who have paid tax at the 30% rate, should consider amending their returns. Hopefully the ATO gives guidance on its attitude to these amendments in addition to the information that it has already released.”

Background:

As part of the Government’s Enterprise Tax Plan, the corporate tax rate for small corporate tax entities has been cut to 27.5%. The turnover threshold that applies for a corporate tax entity to qualify for the lower corporate tax rate will increase annually from $10 million in the 2016-17 income year to $50 million in the 2018-19 income year.

The draft legislation and explanatory memorandum can be found on the Treasury website.

The Minister for Revenue and Financial Services said in a media release that the policy decision made by the Government to cut the tax rate for small companies was not meant to apply to passive investment companies.