On Fri 24.8.2018, the ATO released Draft Law Companion Ruling LCR 2018/D7 which considers the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act 2018, after the Bill passed both houses (on 23.8.2018) and ahead of it obtaining Royal Assent (on 31.8.2018) – see related Tax Technical Article.
This law implements the 80% passive income test, for access to the lower rate of tax (currently 27.5%). It effectively ensures that all companies that are under the relevant turnover threshold (currently $50m) can access this lower rate, unless they have more than 80% of relevantly defined ‘passive’ assessable income.
The Income Tax Rates Act 1986 (Rates Act),already had a s23AA, giving the lower rate to so called ‘base rate entities’, but this Act amended that definition so as to substitute the requirement that the company ‘carry on business’ to one where it must not have more than 80% of its assessable income is ‘base rate entity passive income’ – that is various types of income defined as relevantly ‘passive’ in a new S23AB of the Rates Act.
The Act also makes changes to how a corporate tax entity calculates the amount of the franking credit it may attach to a frankable distribution of a company on the lower tax rate. Essentially, the franking rate matches the tax rate (currently 27.5%) but lagging one year behind the tax rate. In other words, the applicable threshold is measured in the year in which the tax is assessed, but the matching franking rate does not apply until the next year (once the turnover from the previous year, and the applicable tax rate) are known.
Law Companion Rulings are a form of ruling designed to support and explain new laws, such as these ‘base rate entity’ changes.
This draft Ruling provides proposed advice on:
- the general scheme of the new law;
- what amounts of assessable income are ‘base rate entity passive income’ (Passive Income) including the meaning of rent, interest and when a share of net income of a trust or partnership is referable to an amount of Passive Income. Passive Income includes corporate distributions, non-share dividends, interest (with some exceptions), royalties, rent, a gain on a qualifying security, a net capital gain;
- how to calculate a corporate tax entity’s corporate tax rate for imputation purposes and work out the maximum amount of the franking credit it may attach to frankable distributions.
PROPOSED DATE OF EFFECT: When finalised, the Ruling will be a public ruling, effective from the application date, for the new law, which is from the 2017-18 year of income and later years of income.
COMMENTS are due by 5 October 2018.
[LTN 163, 24/8/18; Tax Month – August 2018]
Comprehension questions (answers available)
- Will this ‘Companion Ruling’ (when finalised) support the change in the law, making it clear that all companies (under the relevant turnover cap) will be taxed at the lower corporate rate (currently 27.5%) unless more than 80% of their assessable income is relevantly ‘passive’ (as defined in new s23AB of the Rates Act)?
- Will it still be a requirement, to be taxed at the lower rate, that the company ‘carry on business’?
- Does the draft ruling cover what types of income are relevantly ‘passive’?
- Does the draft ruling cover the way to determine the correct franking rate for ‘base rate entities’?