Yesterday, the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 was passed, confirming which companies are eligible for the lower company tax rate.
From the 2017-18 income year, a 'bright line' test will determine eligibility for the lower company tax rate. Under the bright line test, companies that receive more than 80 per cent of their income in passive forms will not be eligible for the lower company tax rate of 27.5 per cent.
The ATO will soon issue a draft Law Companion Ruling to assist taxpayers to apply the new test, providing further detail about applying the passive income test and how to work out the amount of franking credits that can be attached to distributions.
The bill had previously been a source of much uncertainty to practitioners and their corporate clients, with the ATO releasing draft practical compliance guideline PCG 2018/D5 in a bid to clarify its compliance and administrative approach.
Speaking to Accountants Daily, TaxBanter senior tax trainer Robyn Jacobson said the passage of the bill would provide some degree of certainty as companies moved to prepare their return for the 2018 income year.
“There may be some companies in the early stage of this compliance season in the last six to eight weeks, that have already lodged a 2018 company tax return, based on the current law that applies right now but as soon as this bill is enacted, and that is any time now, then those amendments go back to 1 July 2017, so a company may need to revisit a tax return that is already lodged for 2018 to see if it needs to be changed,” said Ms Jacobson.
“Given we are so early in the season, I wouldn't think there would be that many company returns lodged so far, and I'm very relieved that we've now got certainty on that aspect this early in the year.”
However, Ms Jacobson highlighted that there were still some technical issues associated with the bill, particularly around the assessment of a passive income.
“We're getting some anomalous outcomes with the bill passing into law. For example, with my discussions with the ATO, they've confirmed that a licence fee would be a royalty, and a royalty is a form of passive income,” said Ms Jacobson.
“You could have a company that is carrying on a business, is trading, has 45 employees, but it happens to be a software development business and because its income would be primarily derived from licence fees or registration fees and subscriptions, that would be royalty and that means more than 80 per cent of its income would generally be passive income and it would be taxed at 30 per cent even if its turnover is under $25 million.
“Conversely, you could have a corporate beneficiary and the intention is that it is passive and shouldn't be getting the lower tax rate, but when you work it through and all that company does is receive its distribution from a trust that carries on a business, then that income retains that character and it means when it passes into the corporate beneficiary, it will pass the passive income test and be taxed at 27.5 per cent, so we're getting outcomes that may not be expected.”