Excluding passive investment companies from the reduced corporate tax rate

Chartered Accountants Australia and New Zealand has reported the following today:

After much uncertainty surrounding which companies can access the lower corporate tax rate, the government has released exposure draft legislation to clarify that passive investment companies cannot access the lower company tax rate for small business. The government has effectively introduced an 80:20 test.

The draft bill amends the definition of “base rate entity” of the Income Tax Rates Act 1986 so that a corporate tax entity will not qualify for the lower company tax rate for an income year if 80% or more of its assessable income is “base rate entity passive income”. Base rate entity passive income includes:

  • dividends;
  • interest income;
  • royalties;
  • rent;
  • capital gains; and
  • amounts that flow through a partnership or trust to the extent that it is attributable to passive income.

Base rate entity passive income does not include a non-portfolio dividend (company receiving the dividend has a voting interest amounting to at least 10% of the voting power in the company paying that dividend). Therefore, dividends derived, for example, by a holding company which are made by a wholly-owned subsidiary company that carries on active trading business will not be base rate entity passive income of the holding company.

The amendments will broadly commence on 1 July 2016 and apply to the 2016-17 income year and later years.

The draft legislation is available on the Treasury website. Submissions on the exposure draft legislation are due by 29 September 2017.