In this article, we will discuss the requirements for the previous corporate tax rate reduction for the 2015/16 and 2016/17 income years as there may be some savings to be had.
In essence, a company that is a Small Business Entity (SBE) was eligible for the reduced tax rates of 28.5% for the 2015/16 year and 27.5% for the 2016/17 year. A company is an SBE if the entity:
- is carrying on a business, and
- has an aggregated turnover of less than the turnover threshold.
The “aggregated turnover” threshold is $2 million for the 2015/16 year and $10 million for the 2016/17 year.
Late last year the Australian Taxation Office (ATO) issued draft Taxation Ruling TR 2017/D7 to provide its view on the meaning of “carrying on a business” for a company. In short, the ATO states that, where a company is established or maintained to make profit or gain for its shareholders, it is likely to carry on business. This is so even if the company only holds passive investments, and its activities consist of receiving rents or returns on its investments and distributing them to shareholders.
In practice, this means companies that were not previously regarded as carrying on a business, such as holding companies, passive investment companies and even corporate beneficiaries, are in fact, carrying on a business based on the ATO’s view. If the aggregated turnover is below the threshold, these companies should be able to access the reduced company tax rates.
For imputation purposes though, a franking rate of 30% is still applicable for dividends paid in the 2015/16 year by a qualifying SBE company but only 27.5% for dividends paid in the 2016/17 year. Practical consideration must be given to the potential impact this may have on any dividends already declared in the 2016/17 year. For SBE companies that have previously declared fully franked dividends in the 2016/17 year, a lower imputation rate of 27.5% will result in the shareholders (or individual beneficiaries received franked distributions) having to pay more top-up tax or at the very least, having to pay back refunded franking credits.
Therefore any decision to apply the reduced corporate tax rate or amend prior year tax returns to apply that rate needs to be balanced against the impact of reduced franking credits for dividends declared in the 2017 year.
We understand that the ATO had advised it would adopt a facilitative approach to compliance in relation to the application of the “carrying on a business” test for the 2016/17 year and that it would not select companies for audit unless their decision in relation to the test was “plainly unreasonable”.
This is particularly relevant for tax returns that have already been lodged. Given the ATO’s facilitative approach on this issue, consideration should be given to the overall tax position of the client (at both the company and the shareholder level) when deciding whether to amend their 2017 tax returns.
If you have any queries on the subject, please contact (08) 9474 6333 and we would be happy to arrange an appointment to discuss it further.