Senior tax counsel at The Tax Institute Professor Bob Deutsch has labelled Wednesday’s announcement of a new bill clarifying the government’s stance on companies eligible for the lower company tax rate as an incomplete policy outcome and warned of a “flurry of amended tax returns”.
“This whole saga is a good example of how not to develop tax policy – a move to reduce the corporate tax rate from 30 to 25 per cent, what should be a straight-forward exercise, has led to a plethora of rates cascading down over a number of years; confused definitions of carrying on a business and passive income; problems with changed arrangements for franking credit utilisation and generally an enormous amount of wasted time and energy,” Professor Deutsch said.
“The government and most particularly the Senate have much to answer for in regard to the creation of this mess.”
The new ‘bright line’ test will ensure that a company will not qualify for the lower company tax rate if more than 80 per cent of its assessable income is passive income — such as interest, dividends or royalties, with the amendment to apply prospectively from the current year forward.
Professor Deutsch believes that while the new bill resolves some issues, the requirement of “carrying on a business” for preceding years will continue to cause confusion.
“For the 2015/16 and 2016/17 years, the carrying on a business requirement is critical to secure the lower corporate tax rates and the understanding of the circumstances in which a company can be said to carry on a business for those years is as confused as ever with no additional guidance being provided by this bill,” said Professor Deutsch.
“A flurry of amended tax returns is likely to hit the ATO from companies that have lodged 2016 returns on the assumption that they are not entitled to the lower corporate rate.
“Now that the ATO’s wider interpretation that passive investment companies carry on a business will stand for that year, those companies will seek to reopen and claim back tax paid on the assumption that the higher corporate rate would apply.”