The House of Representatives passed the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 on Thur 8.2.2018, with 1 Government amendment.
The purpose of the Bill is to change the basis on which a company can retain the 30% tax rate. This is for companies that otherwise qualify for the lower 27.5% tax/franking rate, because their turnover is under the relevant threshold, for that year. They will have to pass a ‘passive income test’ (which is, broadly, that more than 80% of their gross income is of stated ‘passive’ forms of income). These entities are defined as ‘base rate entity’ in s23AA of the Income Tax Rates Act 1986. And these tax rate changes, flow through to the franking/imputation provisions. One of the problems, that these changes are aimed at solving, is that investment companies, with non-portfolio interests, in other bigger companies, will receive 30% franking credits, but would, otherwise, be limited to passing on, to its shareholder, only 27.5% franking credits (for each dollar of dividend).
The Bill was passed with one Government amendment, which was to insert exclude ‘interest’ from being relevantly passive, if it is received by a bank (or other stated financial institutions) – see s23AB(2)(a) of the 1986 Rates Act.
Also, ‘interest’, is not relevantly ‘passive’, to the extent that it is a ‘return on an equity interest in a company” (see new para (2)(b) of s23AB). A ‘equity interest’ could be legal form debt, but with a return that is sufficiently variable or contingent, for it to be treated as an ‘equity interest’ under tax law. The Government don’t want a return, that might be styled as ‘interest’, to be counted as ‘interest’ for these purposes. The extent to which returns on equity interests, are relevantly ‘passive’ is set out in other provisions (in new s23AB(1)).
The Bill now moves to the Senate.
DATE OF EFFECT: the 2017-18 income year.
Study questions (answers below*)
- Is this Bill about leaving ‘base rate entities’ with a 30% tax rate (and franking rate) – as a ‘carve out’ from the 27.5% tax rate, that would otherwise apply to companies, whose turnover was less than the threshold amount for that year?
- Will ‘base rate entities’ be defined by reference to an 80% passive income test that is set out in s23AB of the Income Tax Assessment Act 1936?
- Did the Government amendment exclude, interest derived by banks, from the category of ‘interest’, that counts as ‘passive’, in the ‘base rate passive income test’ (in s23AB)?