On 18 September 2017, the Government released draft legislation proposing to ensure that corporate tax entities with predominantly passive income cannot access the lower corporate tax rate of 27.5%. As explained by the Minister for Revenue, the Government’s decision to cut the tax rate to 27.5% for small businesses was not meant to apply to passive investment companies.
The Draft Bill will amend the tax law to ensure that a company does not qualify for the lower corporate tax rate of 27.5% if 80% or more of its assessable income is passive income (such as rent, dividends, interest and capital gains).
A small corporate tax entity will also need to “carry on a business” in the year of income to be eligible for the lower company tax rate of 27.5% (instead of the top corporate tax rate of 30%). To qualify, the aggregated turnover of the corporate tax entity for the income year must also be less than the relevant threshold for the income year (ie $10m for 2016-17; $25m for 2017-18; and $50m for 2018-19 and later years).
In terms of working out the maximum franking credit for a distribution, the Draft Bill proposes to amend the definition of the “corporate tax rate for imputation purposes” so that the entity can assume that its aggregated turnover, “base rate passive income” and assessable income is equal to the amount for the previous income year. If the corporate tax entity did not exist in the previous income year, its corporate tax rate for imputation purposes will be deemed to be the lower corporate tax rate of 27.5%.
Full details will be reported in Thomson Reuters Weekly Tax Bulletin (Issue 40 – 22 September 2017). Sign up for a special free trial of Weekly Tax Bulletin here.