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The government has released draft tax legislation clarifying that passive investment companies cannot access the lower company tax rate for small businesses, a move which has been welcomed by a mid-tier firm and an accounting body.
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Government signals verdict on passive investment company tax rate
19 September 2017
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Yesterday, a media release from Minister for Revenue and Financial Services Kelly O’Dwyer revealed that the policy decision made by the government to cut the tax rate for small companies was not meant to apply to passive investment companies.
This news comes after confusion arose earlier this year as to whether passive investment companies would receive the tax cut or not.
The exposure draft bill amends the tax law to ensure that a company will not qualify for the lower company tax rate if 80 per cent or more of its income is of a passive nature such as dividends and interest.
“The Turnbull government is committed to lower taxes on business because we want to see them invest and grow,” Ms O’Dwyer said.
“These amendments will provide greater clarity about who qualifies for the lower company tax rate by excluding passive investment companies.”
Chartered Accountants Australia and New Zealand’s (CA ANZ) head of tax, Michael Croker, welcomed the news of the draft legislation and has announced that CA ANZ will make a submission.
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“The Government’s decision to amend the law is a welcome circuit-breaker for an issue that has caused much confusion,” Mr Croker said.
However, Mr Croker highlighted that the 80 per cent test will create another non-tax issue to small business companies to manage.
“Accountants will road-test the 80 per cent threshold through their small company client base to determine the impact,” he said.
“One area of concern is the year-to-year nature of the test. There could be scenarios – such as where an active business has been sold and the company directors take time to purchase or commence a new business – where there’s money just sitting in the bank account earning interest.”
BDO tax partner Mark Molesworth also welcomed the move which he labelled as “unexpected”.
“The rules have been changed so that as soon as 80 per cent of a company’s income comes from ‘passive’ sources, it cannot use the lower tax rate, irrespective of its aggregated turnover. Passive income includes dividends, interest, royalties and partnership and trust distributions attributable to passive sources,” Mr Molesworth said.
“Therefore corporate beneficiaries of trusts that carry on an active business can take advantage of the lower tax rate. A similar tracing approach applies to dividends received from companies in which a shareholding of at least 10 per cent is held. This is an unexpected, but welcome, outcome.”
Mr Molesworth highlighted that given the amendments only apply to the year ended 30 June 2017 and later years. some passive income companies may need to review their tax return for the 2016 year.
“The government appears to have abandoned any amendment in relation to the 2016 year where the 28.5 per cent rate applied to companies with an aggregated turnover of less than $2 million,” he said.
“Therefore companies with passive income in that year, who have paid tax at the 30 per cent rate, should consider amending their returns.”
“Hopefully the ATO gives guidance on its attitude to these amendments in addition to the information that it has already released.”
The draft legislation is open for consultation with submissions due by 29 September 2017.
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