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Dec 2017 3 Minutes

Passive Investment Companies And The Lower Tax Rate – Take 3!

The Australian Taxation Office (ATO) in a footnote to the draft ruling TR 2017/D2 stated that the activities of passive investment companies may also constitute carrying on a business.  As a consequence of this there was a view that this meant passive investment companies could not only qualify for the reduced corporate rate of 27.5%, but also possibly other small business entity concessions, such as the CGT concessions, Small Business Rollover Restructure, immediate depreciating assets write-off and many others.

At the time the Revenue Minister, Kelly O'Dwyer, issued a media release stating that reports that the ATO had broadened the interpretation of company tax cuts were premature.  The Minister further stated 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.

On 18 September 2017, the Government in turn released exposure draft legislation proposing to ensure that corporate tax entities with predominantly passive income (such as rent, dividends, interest and capital gains) cannot access the lower corporate tax rate of 27.5%.

Having received numerous comments on the draft legislation the Government then introduced new legislation on 18 October 2017 to apply retrospectively from 1 July 2017 enabling a company to access the 27.5% tax rate if:

  • no more than 80% of the corporate tax entity's assessable income for that income year is “base rate entity passive income”; and
  • the aggregated turnover of the corporate tax entity for the income year is less than the aggregated turnover threshold for that income year ($25 million for 2018).

The final legislation was different to the exposure draft legislation in that it removed the requirement for the company itself to be carrying on a business.

In broad terms, “base rate passive income” will comprise dividends, interest, rent, royalties and net capital gains.  Furthermore a company’s entitlement to assessable income consisting of partnership or trust income will also be considered passive income to the extent it is referable to amounts of passive income derived by the partnership or trust.

So essentially where a company derives at least 20% of its income from non-passive sources, either directly or indirectly through a partnership or trust it will be able to access the 27.5% tax rate for the 2018 year.  The only proviso is that its aggregated turnover is less than $25 million.

This clearly enables corporate beneficiaries of trusts that derive at least 20% of their income from non-passive sources to access the lower 27.5% tax rate.

Please contact Iggy Moro if you have any queries.