The Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017  began a long passage to become law, when it was introduced into the Lower House on 18.10.2017, passed the Lower House on 8.2.2018 (as a 2018 Bill), passed the Senate on 23.8.2018 and received Royal Assent, as Act No. 94 of 2018, on 31.8.2018.

The Bill ensures that, with effect from the 2017-18 income year, a company will not qualify for the lower company tax rate of 27.5% if more than 80% of its assessable income is passive income (such as interest, dividends or royalties). This was for two purposes.

  1. Was to make it clearer, when a company was entitled to the lower 27.5% rate (as the Commissioner introduced uncertainty by taking an unexpected view of when a company was ‘carrying on a business’.
  2. It was also to allow companies which were receiving 30% franked dividends (from ‘big’ companies) could pass on all those dividends, without leaving 2.5% points of Franking Credit behind trapped in the company, until untaxed profits could be distributed and franked. However, this latitude was to be only available to companies that were predominantly investment companies.

A feature of this reducing corporate tax rate regime, is that the ‘franking credit’ rate, falls (or rises) with the company’s tax rate – but 1 year lagged. In other words, the franking credit rate isn’t set until the previous year is finished and the company’s turnover can be calculated (setting the tax rate, for that year gone by and the franking rate for the year to come).

The Bill passed the Lower House 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 Income Tax Rates Act 1986.

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)).

DATE OF EFFECT: the 2017-18 income year.

The Commissioner issued a draft Law Companion Guide: LCG 2018/D7, on how this new law works. I’ve covered this in a related Tax Technical Article.

FJM 9.9.18

[APH website: Bill Tracker, Bill as passed by both Houses, Revised EM; Tax Technical – Article on Passing Lower House; LTN 162, 23/8/18; LTN 169, 3/9/18;  Tax Month – August 2018]

 

Comprehension questions (answers available)

  1. Is this Bill about leaving some entities (‘base rate entities)’ with a 30% tax rate, as a ‘carve out’ from the 27.5% tax rate?
  2. 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?
  3. Did the Government amendment exclude, interest derived by banks, from the category of passive ‘interest’ income (in s23AB)?

[Answers:1.yes;2.no(s23ABofTheIncomeTaxRatesAct1986);3.yes]

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