The staged introduction of the 27.5% lower rate of company tax began on 1 July 2016, using a ‘carrying on business’ test, probably intending it to exempt companies receiving ‘passive’ investment income. That, however, hit headwinds, when the Commissioner started making his views known in a form that he later issued as TR 2017/D7. The problem was with companies receiving dividend income franked at 30% and then not being able to pass on franking credits at greater than 27.5%, as explained in this earlier Tax Month article. The result was an amending Bill to change the law so that companies with 80% or more ‘passive income’ could go on using the old 30% tax and franking rates. However, this change is only intended to start on 1 July 2017, leaving the previous year still operating under the old ‘carrying on business’ test.
To deal with this transitional period, the Commissioner issued the ruling TR 2017/D7, which was about the meaning of carrying on business, for the purpose of the new s23AA of the Income Tax Rates Act 1986 – which defined ‘base rate entity’, in terms of ‘carrying on business’ (at least for this transitional period).
This is a long way of getting round to saying that the Commissioner has announced, on his website, that he will change the ruling so that it rules on the meaning of ‘carrying on business’ in the substantive part of the tax law (not just the Rates Act).,
The Commissioner says:
“Early consultation on the Ruling has highlighted a question about the provision around which the advice should be framed. The draft Taxation Ruling addresses whether a company is carrying on a business for the purpose of identifying whether it is a base rate entity in section 23AA of the Income Tax Rates Act 1986 (ITRA 1986). This is relevant for determining whether it is subject to the 27.5% or 30% corporate tax rate in the 2017/18 and later income years. The reasoning expressed in the Ruling is, however, equally applicable to determining whether a company is a small business entity within the meaning of section 23 of the ITRA 1986 and section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2015/16 and 2016/17 income years and therefore which rate is applicable to it in those income years.
In light of this and the proposed changes to the law, the Commissioner is proposing to finalise the draft Ruling in relation to section 23 of the ITRA 1986 and 328-110 of the ITAA 1997, rather than section 23AA of the ITRA 1986 as it is presently drafted.”
This is worth keeping in mind, later, when trying to argue that a company carries on business, and a broad definition suits you.
[FJM; LTN 211, 3/11/17; Tax Month Nov 2017]
Background to the corporate rate reductions by size of company
On 1 September 2016, the Government introduced Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 that proposed to progressively reduce the corporate tax rate from 30% to 25% for all corporate entities. The Bill was subsequently amended to apply to corporate entities with an aggregated turnover of less than $25 million for the 2017–18 income year and less than $50 million for the 2018–19 income year – known as base rate entities. That was under Treasury Laws Amendment (Enterprise Tax Plan) Act 2017, which received Royal Assent on 19 May 2017.
Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 was introduced to the House of Representatives on 11 May 2017. If passed, it will increase the turnover thresholds for corporate entities that will be eligible for the lower corporate tax rate in future years.
On 18 October 2017, the Government introduced the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017. If this receives Royal Assent, corporate entities with no more than 80% base rate entity passive income will be eligible for the lower corporate tax rate. The date of effect will be from the 2017–18 income year.