The passage of Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 will mean a company will not qualify for the lower company tax rate of 27.5 per cent if more than 80 per cent of its assessable income is passive income.
“This is a ‘bright line’ test that will replace the previous requirement that a company be ‘carrying on a business’” a statement from the government said.
The amendment will apply prospectively from the 2017/18 income year. In the 2016/17 income year, a company will need to be carrying on a business and have a turnover under $10 million to qualify for the 27.5 per cent tax rate.
“Interested parties should also take note that the ATO has released TR 2017/D7 about when a company carries on a business for the purposes of the lower tax rate provision. In essence this ruling notes that most companies, other than those that are not undertaking activities with an intention of deriving a profit, will be carrying on a business for these purposes,” BDO’s tax partner Mark Molesworth told Accountants Daily.
The exposure draft (ED) was met with contention in mid-September, and mid-tier firms like HLB Mann Judd are satisfied that key issues have since been addressed after consultation with industry.
“A welcome change in the bill compared to the ED is in the timing of commencement, in that under the bill the ‘bright line’ test will apply prospectively for the 2017/18 year onwards, noting also that the test will be applied each year based on the previous year’s percentage of passive investment income and aggregated turnover,” partner for taxation services, Peter Bembrick, told Accountants Daily.
“It had been proposed in the ED that the test would apply retrospectively from the 2016/17 year, which in our view had the potential to cause significant problems for companies that have already finalised their 2017 financial statements and income tax returns, paid dividends, issued dividend statements to shareholders and in some cases amended dividend statements following previous government announcements.
“This would affect small public companies in particular, and in our view it would have been unreasonable to force such companies to make amendments to the various documents, not to mention the impact on shareholders who may have already lodged their own 2017 income tax returns.
“Fortunately the outcome of consultation by Treasury with accounting firms and professional bodies is that the government has removed this aspect of retrospectivity. There may still be some impact where companies have declared franked dividends since 1 July 2017, but the situation should be much more manageable than if the changes had been applied to the 2016/17 year.”
Mr Bembrick put together a checklist of key items for accountants to assess now, including:
- Review companies who have already lodged their 2017 tax returns, and those under preparation, in the light of the ATO’s draft ruling TR 2017/D7 and other available guidance, especially if the existence of a business is not immediately obvious
- If there are particular concerns on this point, options to consider may include preparing a reasonably arguable position paper, obtaining a private ruling from the ATO, or seeking an opinion from a revenue law barrister
- Review the situation for companies who have declared dividends since 1 July 2017, and review the application of the “bright line” test with reference to the bill and examples in the Explanatory Memorandum
- More generally, review the implications of the new rules for clients’ structures (especially those with multiple layers, including trusts) going forward, and ensure that the implications of future tax and dividends are appropriate
- Pay particular attention to structures involving businesses that may still generate large amounts of passive income, such as rent payable by an operating company to a related entity owning the business premises
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