On Wednesday 25.7.2018, the ATO issued Draft Practical Compliance Guideline PCG 2018/D5 (Enterprise Tax Plan: small business company tax rate change: compliance and administrative approaches for the 2015-16, 2016-17 and 2017-18 income years). This 2018 draft PCG replaces Draft PCG 2017/D7, which only covered the 2017 financial year and was not as extensive.
This 2018 draft PCG acknowledges the potential for confusion, in the minds of taxpayers, over which companies can/must access the lower tax / lower franking credit, regime. This arose for the following reasons.
- The first version of the corporate rate reduction laws, required a company to be a ‘small business entity’ to access the lower rates (and thus it had to ‘carry on a business’).
- The Commissioner, however, surprised taxpayers, by concluding that even passive income activities (not normally constituting a business or business activity) would result in a company ‘carrying on a business’ (were it incorporated to earn profits, which most are). He confirmed these views publicly when he issued his draft Ruling: TR 2017/D7.
- Concerned that its original intention had been derailed by the Commissioner’s views on ‘carrying on business, the Government then introduced a further Bill, re-instating the original understanding, that companies with predominantly ‘passive income’, did not qualify for the lower rate (or more particularly, could stay outside the lower rate / lower franking rate, regime). This is the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 , which, at the time of writing, remains before the Senate.
- Should this Bill pass, however, it would only change the law for, the 2018 and subsequent income years (leaving the earlier two years being determined on potentially a different set of criteria).
- And, on top of this, the turnover threshold kept increasing, in every one of the 2016, 2017 & 2018 financial years.
There is a good summary of the history of this, and the factors creating the confusion, in paras 3 to 8 of the 2018 draft PCG. See, also, the related TT Article.
In his 2018 Draft Guide, the Commissioner addresses this confusion, by saying the following.
- He says he will not allocate compliance resources to review whether a company was carrying on a business in the 2016 & 2017 financial years. However, this compliance approach will not apply in certain cases (eg if a company’s assessment that it was carrying on a business was “plainly unreasonable” or if certain tax-avoidance arrangements were entered into); and
- He also says he will facilitate compliance, for any company that concludes that it has to correct the rate at which it franked its dividends. Normally, to correct an incorrect franking distribution statement, the company would have to apply to the Commissioner. The Commissioner however, says he will not apply penalties, if the company gives its shareholders a corrected distribution statement (in the way required for the initial distribution statement), for either or both of the 2016 & 2017 financial years.
The Commissioner ‘blind-sided’ most people, when he issued his draft ruling (TR 2017/D7) about companies carrying on a business, much more easily than most people had assumed. Even if he was re-discovering old (and probably correct) case law, it was not what the taxpaying public expected, or wanted, to hear. In particular, private companies, investing in big companies, that pay 30% franking credits, would then only be able to pass on 27.5% franking credits, when ‘on-paying’ that same dividend income, to its shareholders. This would leave behind the missing 2.5% franking credit, trapped in the Company, until it had untaxed profits, to fund a dividend (which it could frank).
DATE OF EFFECT: 2015-16 to 2017-18 income years.
COMMENTS are due by 24 August 2018.
FJM 13.8.18
[LTN 141, 25/7/18; Tax Month – July 2018]
Comprehension questions (answers available)
- Does this later 2018 draft PCG say that the Commissioner won’t audit companies, to determine whether they carried on a business or not, in the 2016 & 2017 financial years?
- Does the 2018 draft PCG also say that a company can issue a corrected franking distribution statement (if it feels it must) without having to come to the Commissioner, individually?
- Did most people expect the Commissioner to rule, that passive income earning activities, will constitute a carrying on a business, for most companies?
- Do companies with ‘passive’ investments, in large companies that will still pay 30% franked dividends, find they have franking credits trapped in the company, if they unexpectedly fall into the lower tax and lower franking credit regime?
