Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entitles) Bill 2017 was finally passed by the Senate into law on 23 August 2018. This provides certainty for corporate taxpayers as we head into the lodgement and compliance season. The new legislation introduces a new “bright line test” to determine eligibility for the lower company tax rate (currently 27.5%).
This new test applies from 2017/2018 onwards. It provides that corporate tax entities that receive more than 80% of their assessable income in passive forms (broadly interest, rent, royalties, dividends and capital gains) will not be eligible for the lower tax rate irrespective of their level of turnover.
In simple terms, this test requires a comparison of a company’s total passive income for the financial year against its assessable income for that same financial year.
This new test can throw up some anomalous outcomes. For instance, a corporate beneficiary that is set up solely to receive distributions from a trust that carries on a business would under this test be eligible for the lower company tax rate, however a software development company that has 30 employees, but derives its income from licence fees/subscriptions (royalties) would not be.
The new 80% “passive income test” applies from 1 July 2017. Therefore, the small number of companies that have already lodged their 2017/2018 tax returns on the basis of the old law (the “Small Business Entity test”) may need to revisit those returns and amend if necessary. For the many companies that are yet to lodge, they should do so under the new 80% “passive income test”. For further information contact Hooper Accountants.