Last month, the government introduced a bill clarifying that 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.
RSM director and national head of tax Rami Brass said the proposed legislation meant that companies with passive income sitting around the 80 per cent mark needed to be especially diligent.
“As a result of the proposed legislation, trusts and partnerships will need to clearly identify the nature of the income distributed to partners and beneficiaries to track its character for recipient companies,” said Mr Brass.
“However, those companies that straddle the 80 per cent passive income line may find that they alternate between the lower and higher tax rates, especially if they derive larger capital gains from the sale of an investment, for example.
“As the base rate passive income percentage effectively carries forward for franking purposes, taxpayers may need to manage the dividends paid to shareholders in years where the higher franking rate applies. This could provide some opportunities for taxpayers to use some franking credits that have been built up during a 30 per cent tax period.”
Companies with predominantly passive incomes or trading companies that are selling capital assets may need to manage their net capital gain position to access the lower tax rate, according to Mr Brass.
Mr Brass believes there is certainty around franking dividends if “companies assume their aggregated turnover and base rate passive income is the same as the prior year”, but warns of traps as the threshold for accessing the lower tax rate increases.
“As the legislation transitions through the increasing aggregated turnover thresholds, companies with aggregated turnover of less than $25 million may now be restricted to franking dividends at 27.5 per cent,” said Mr Brass.
“This might trap franking credits in the company that had built up at the higher tax rate. Companies with aggregated turnover between $25 million and $50 million might consider reviewing their dividend strategy during 2018 to ensure that dividends can be franked at that higher rate.
“As we are now close to halfway through the current financial year, companies expecting to generate a large amount of base rate passive income should carefully consider if they qualify for the reduced corporate tax rate.”