Andy Hutt and Matthew McRae discuss the tax rate changes which were passed in the Senate.
On Wednesday 22 August, Part Two of the Government’s Enterprise Tax Plan (‘Plan’) was defeated in the Senate. There are no current prospects for its revival, and it’s unclear whether Prime Minister-elect Scott Morrison would reconsider the policy in the future.
The Plan would have reduced company tax cuts for all companies progressively down to 25 percent.
Presently, the 25 percent will now be phased in for ‘base rate entity’ companies with an aggregated turnover (AT) of less than $50 million per annum. The current tax rate for these companies is 27.5 percent (for 2018-19), with all non-base rate entity companies liable for tax at the pre-existing rate of 30 percent.
On 23 August, however, the Parliament passed the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018. The policy objective of this bill is to deny eligibility for the lower tax rate to a company with more than 80 percent passive income.
This test requires identification of the taxpayer’s ordinary income derived in the ordinary course of carrying on a business, in addition to the ordinary income of other entities whose income is required to be aggregated with that of the taxpayer.
Those other entities include ‘connected entities’ and ‘affiliates’. A connected entity includes one which controls, or is controlled by, the taxpayer, or which together with the taxpayer is under the control of a third entity. An affiliate includes an entity which, in relation to its business affairs, could reasonably be expected to act in accordance with the directions or wishes of the taxpayer.
The AT test includes the ordinary income of test entities that may not be assessable in Australia, for example, the income of foreign subsidiaries.
Passive income will generally include: dividends and franking credits, interest income, rent and royalties, gains on certain qualifying securities, net capital gains, and any of these types of income that are received through trusts or partnerships.
Non-portfolio dividends (being dividends from a company in which the recipient controls more than 10 percent of the voting shares), and interest derived from loans made in the course of carrying on a banking or lending business, will not be passive income.
If more than 80 percent of a company’s income is passive it will fail the passive income test, and will not be a base rate entity meaning it will be ineligible for the lower corporate tax rate.
The passive income rules will apply from the 2017-18 year of income, creating an immediate concern for affected taxpayers in relation to their 2017-18 tax return lodgements.
|Financial year(s)||Aggregated turnover threshold||Tax rate for companies for base rate entities||Tax rate for companies with turnover exceeding the threshold or more than 80% passive income