Last month the government released draft tax legislation for public consultation clarifying that passive investment companies cannot access the lower company tax rate for small businesses, after confusion arose earlier this year as to whether passive investment companies would receive the tax cut or not.
The legislation seeks to prevent companies from qualifying for the lower corporate tax rate if more than 80 per cent of their assessable income comprises passive income.
Moore Stephens director Tim Elliott said that these changes could negatively impact passive investment companies.
“To an extent the changes will reduce the attractiveness of holding shares in an investment company, this said the 30 per cent corporate tax rate continues to be more attractive than the highest marginal tax rate for individuals (45 per cent excluding Medicare levy),” Mr Elliott said.
“Some companies, such as those with significant existing franking account balances and those receiving mainly franked dividend income (franked based on 30 per cent tax rate) may benefit from the 30 per cent tax rate as they will be able to pass on a greater amount of franking credits to shareholders than would be the case if eligible for the lower rate of tax.”
While the draft legislation proposes that the changes will apply to FY17 and later income years, Mr Elliot said that as the lower corporate tax rate is extended over the next 10 years, investment companies may eventually fall under the requirements.
“It should also be noted that, as the government is proposing to extend the lower corporate tax rate to all companies (regardless of turnover) by FY24, companies primarily receiving passive income may eventually be eligible for the lower corporate tax rate.”