In our recent article entitled “Corporate Tax Cuts. What do they mean for you?”, we referred to the relevant minister (Kelly O’Dwyer) questioning the ATO provisional interpretation of when a company would be “carrying on business” for the purpose of the reduction in the small business corporate tax rate.
The Treasury has now released its exposure draft legislation regarding its proposal to limit the small business corporate tax rate to companies that do not exceed a passive income threshold of 80%.
Currently, a company that carries on business and does not exceed the aggregated turnover threshold (being $25 million in FY 2018 and $50 million for FY 2019) is eligible to apply the lower corporate tax rate of 27.5%.
The additional requirement would be that a company’s passive income must not be 80% or more of its assessable income in any financial year, in order to be eligible for the lower rate. Passive income would be exhaustively defined, and includes rent, royalties, capital gains, interest (subject to certain exclusions) and trust or partnership income (to the extent that it consists of passive income).
We note the following about the proposed amendment:
- It will apply retrospectively to the start of FY 2017, and therefore may require amendment to returns already lodged on the basis that pure passive investment companies may have thought they were eligible for the lower rate.
- A significant capital gain (e.g. as a result of a sale of business) could result in a company failing the 80% passive income test, which would mean that the standard corporate tax rate of 30% would apply to all of the company’s assessable income for that year.
- Whilst it may be tempting to direct passive income through an eligible company to obtain the lower corporate tax rate, it may expose assets to insolvency risk, as the company must be conducting a business. Therefore, from an asset protection perspective, the reduced corporate tax rate may not be so attractive.
- It is odd that the threshold is defined to be passive income not to exceed 80% as for small business CGT relief it is the other way around i.e. passive assets must not exceed 20%.
The Treasury has completed its consultation process in relation to the exposure draft legislation, and we await introduction of a Bill into Parliament.