Jonathan Willoughby discusses ATO guidance on qualifying for the small business tax rate.
An issue for companies seeking to qualify for the reduced small business tax rate of 27.5 percent is that in addition to not breaching the turnover test (currently $10m), the company must be “carrying on a business”. This requirement has created uncertainty for family investment companies in receipt of trust distributions and/or income from passive investments.
Generally the receipt of passive investment income has not been regarded as enough for a taxpayer to be able to demonstrate that they are carrying on a business. While there has been some uncertainty as to whether this principle applies equally to individual taxpayers and to companies, most advisors have assumed that the Australian Taxation Office (ATO) would apply this approach for the purposes of qualifying for the reduced company tax rate.
Despite the fact that this has been a significant issue for private companies since 1 July 2015, to date the ATO have not released any guidance as to their view.
The ATO recently issued a draft ruling (TR 2017/D2) on an unrelated topic which included a footnote discussing when a company will be regarded as carrying on a business for the purpose of certain tax residency tests. In this footnote, the Commissioner indicates that for the purposes of the tax residency test a passive investment company will nevertheless be viewed as carrying on a business where the company is established or maintained to make profit or gain for its shareholders.
Informal guidance from the ATO Tax Counsel Network is that while each case will need to be considered on its own facts, generally speaking, a similar approach will be applied in relation to qualifying for the reduced small business tax rate. That is, provided a company is not dormant, and has ongoing investment operations that it conducts for the purpose of producing a profit for its shareholders, it will generally be accepted as carrying on a business. Consequently it is likely that the reduced corporate tax rate will apply to a much broader range of private companies than had been expected. The ATO are working through what formal guidance, if any, will be issued on this matter.