Key New Summary:  The Commissioner issued PCG 2018 to facilitate administration of the fraught issue of which companies had to adopt the lower 28.5% and 27.5% tax and framing rates in the 2016, 2017 and 2018 years by not, in the ordinary course, applying audit resources to those issues.


 

On Thurs 6.12.2018, the ATO issued Practical Compliance Guideline PCG 2018/8 – Enterprise Tax Plan: small business company tax rate change: compliance and administrative approaches for the 2015-16, 2016-17 and 2017-18 income years).

The background to this is that:

  • The 30% rate dropped to 28.5% for the 16 year and to 27.5% in the 2017 and 2018 years.
  • The turnover thresholds for each of these reductions was $2m, $10m and $25m, respectively.
  • The reductions were dependant on ‘carrying on business’ in the 2016 and 2017 years and then moved to having no more than 80% of its assessable income of certain ‘passive’ types.
  • To ‘assist’ taxpayers assess whether they were carrying on a business’ for these purposes, the Commissioner issued a draft ruling: TR 2017/D7, which soon gained notoriety for concluding that a company was carrying on business in a far wider range of circumstances than an individual, making it difficult for companies that wanted the higher franking rate, to stay out of the clutches of the rate reduction provisions.
  • The details of these changes are set out in paras 3 to 6 of the PCG.

The Guideline on tax rate is:

11. Given the uncertainty around the ‘carrying on a business’ test prior to the release of TR 2017/D7, the Commissioner will adopt a facilitative approach to compliance in relation to the application of this test. This means that the Commissioner will not allocate compliance resources specifically to conduct reviews of whether corporate tax entities have applied the correct rate of tax or franked at the correct rate in the 2015-16 and 2016-17 income years.

The Guideline on franking credit rates is:

Under this approach, the Commissioner will not allocate resources to review the affairs of members in so far as it relates to the franking of distributions in these circumstances.

This latitude will not be extended, where:

  • The corporate entity’s assessment of whether it is carrying on a business was ‘plainly unreasonable’; and
  • There was a contrived arrangement, tax avoidance scheme and concealed information.

DATE OF EFFECT: 2015-16 to 2017-18 income years.

[ATO website: PCG 2018/8; LTN 236, 6/12/18; Tax Month – December 2018]

FJM 11.1.19

CPD (comprehension) questions

  1. Was the administration of these changes, for companies and their shareholders complicated by the progressive reduction in rates, the progressive increase in thresholds, the change in eligibility requirements (carrying on a business to no more than 80% passive income) and the Commissioner’s surprise draft ruling on carrying on a business?
  2. Is the Commissioner trying to facilitate the administration of this fraught area, by issuing the PCG.
  3. How is he doing this for companies?
  4. How is he doing this for shareholders?
  5. Is there an exception, from the announced latitude, for companies, whose claim to be carrying on business, is ‘plainly unreasonable’?
  6. What is the problem with this.

 

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