Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017

Bills Digest no. 71, 2017–18

PDF version [430KB]

Joseph Ayoub
Economics Section
6 February 2018

Contents

The Bills Digest at a glance
Purpose of the Bill
Commencement
Structure of the Bill
Background

Reducing the corporate tax rate

Table 1: corporate tax rate from 2015–16 under the ETP Act
Table 2: proposed measures in the ETP No. 2 Bill starting from the 2019–20 income year
The ‘carries on a business’ test
Exposure Draft

Committee consideration

Senate Standing Committee for the Scrutiny of Bills
Senate Standing Committee for the Selection of Bills

Policy position of non-government parties/independents
Position of major interest groups
Financial implications

Enterprise tax plan
2016–17 income year

Statement of Compatibility with Human Rights

Parliamentary Joint Committee on Human Rights

Key issues and provisions

Meaning of ‘base rate entity’

Meaning of ‘aggregated turnover’
Connected and affiliated entities
Increasing the threshold

Ratio of ‘assessable income’ to ‘passive income’
Table 3: key differences in the figures used in proposed paragraphs 23AA (a) and (b)
Base rate entity passive income

Distributions
Franking credits
Non-share dividends
Franking non-share dividends
Non-portfolio interest
Interest income, royalties and rent
Interest income
Royalties
Rent
A gain on a qualifying security
Net capital gains
Tracing through partnerships and trusts
Non-portfolio dividends

2023–24 income year onwards

Other provisions

Corporate tax rate for imputation purposes

Concluding comments

Date introduced:  18 October 2017
House:  House of Representatives
Portfolio:  Treasury
Commencement:  Various dates, as set out in this digest

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at February 2018.

The Bills Digest at a glance

Purpose of the Bill

  • The purpose of the Bill is to amend the Income Tax Rates Act 1986 from the 2017–18 income year to prevent passive investment companies from accessing the reduced corporate tax rate until the 2023–24 income year.
  • The Bill is part of the Government’s original policy intent to reduce the corporate tax rate for certain companies under the enterprise tax plan.

Background

  • The Bill has arisen as a result of industry confusion as to when a passive investment company ‘carries on a business’ under the tax law and accordingly, when the company is entitled to the lower corporate tax rate.

Stakeholder concerns

  • Stakeholders have welcomed the ‘bright line’ test introduced by the Bill which provides clarity on when a company will be eligible for the lower corporate tax rate.
  • There are concerns that the Bill arbitrarily limits certain companies from accessing the lower corporate tax rate, even though the company may be carrying on an active business rather than simply receiving passive income.

Key elements

  • To be eligible for the lower corporate tax rate an entity must be a base rate entity for the income year. A company will be a base rate entity if:
    • its aggregated turnover does not exceed $25 million in the 2017–18 income year or $50 million in the 2018–19 income year onwards and

    • no more than 80% of its assessable income is base rate entity passive income.

  • The Bill deems the following income to be base rate entity passive income:
    • distributions (excluding non-portfolio dividends)

    • franking credits attached to such distributions

    • non-share dividends

    • interest income, royalties and rent

    • a gain on a qualifying security

    • net capital gains

    • amounts that flow through a partnership or trust (either directly or indirectly) to the extent that the amounts are referrable to base rate entity passive income.

Key issues

  • The key issue is whether the Bill appropriately distinguishes passive income from other types of income. A company that carries on a relatively ‘active’ business may nevertheless generate base rate entity passive income as a result of that active business. If more than 80% of the company’s income consists of base rate entity passive income then it will be prevented from accessing the lower corporate tax rate.

Purpose of the Bill

The purpose of the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 (the Bill) is to amend the Income Tax Rates Act 1986 (the Rates Act) to clarify which companies are base rate entities and therefore entitled to the reduced corporate tax rate, by:

  • repealing the current definition of base rate entity which requires that an entity ‘carries on a business’
  • inserting a new definition of base rate entity which requires that no more than 80% of an entity’s assessable income is base rate entity passive income and the entity has an annual turnover of less than $25 million in the 2017–18 income year[1] and
  • inserting a definition of base rate entity passive income.

These amendments will apply until the 2023–24 income year. This Bill also consequentially amends the Rates Act in the 2023–24 income year by removing the definition of base rate entity passive income so that from that year onwards, all companies will be entitled to the reduced corporate tax rate regardless of their turnover and the type of income they generate.[2]

The Bill also makes consequential amendments to the Income Tax Assessment Act 1997 (the ITAA 1997) by repealing the current definition of corporate tax rate for imputation purposes and inserting a new one. This is to ensure that the calculation of the maximum franking credit payable by a company on a dividend is aligned with its tax rate for the previous income year.

Commencement

  • Sections 1 to 3 and Schedule 1, Part 2 commence on Royal Assent
  • Schedule 1, Part 1 and Schedule 2, Part 1 commence immediately after the commencement of Part 2 of Schedule 1 to the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 (the ETP Act)—being 1 July 2017 and
  • Schedule 2, Part 2 is contingent on the commencement of Part 5 of Schedule 1 to the Treasury Laws Amendment (Enterprise Tax Plan No. 2) Act 2017, the Bill for which was before the House of Representatives at the time of writing, and commences at the same time.[3]

Structure of the Bill

This Bill is divided into two Schedules. Schedule 1 makes the key substantive amendments to the Rates Act. Part 1 of Schedule 2 repeals the current definition of corporate tax rate for imputation purposes from the ITAA 1997 and inserts a new definition applying from the 2017–18 income year onwards. Part 2 of Schedule 2 repeals the definition and meaning of base rate entity passive income in the Rates Act from the 2023–24 income year.

Background

Reducing the corporate tax rate

The ETP Act, assented to in May 2017, partially implemented the Government’s 2016–17 Budget commitment to progressively reduce the corporate tax rate from 28.5% for companies that are small business entities and from 30% for other companies.[4]

Under the ETP Act, the corporate tax rate for particular entities is reduced as follows:

  • in the 2016–17 income year, the aggregated turnover threshold was increased from $2 million to $10 million for small business entities and the tax rate was reduced from 28.5% to 27.5%
  • in the 2017–18 income year the corporate tax rate was reduced from 30% to 27.5% for companies with an aggregated turnover of less than $25 million and from the 2018–19 year onwards, for companies with an aggregated turnover of less than $50 million – an entity that is eligible for the lower corporate tax rate is known as a base rate entity
  • from the 2023–24 income year, the tax rate applying to a base rate entity is progressively reduced from 27.5% to 25% by the 2026–27 income year.

Table 1 shows the changes made to the corporate tax rate under the ETP Act.

Table 1: corporate tax rate from 2015–16 under the ETP Act

Income Year Aggregated turnover Company tax rate (%)
2015–16 < $2 million[5] 28.5
2016–17 < $10 million 27.5
2017–18 < $25 million  
2018–19 < $50 million  
2019–20    
2020–21    
2021–22    
2022–23    
2023–24    
2024–25 < $50 million 27
2025–26 < $50 million 26
2026–27 onwards < $50 million 25

Source: K Sanyal, Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017, Bills digest, 22, 2017–18, Parliamentary Library, Canberra, 2017, p. 5.

The Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 (ETP No. 2 Bill) was introduced into the House of Representatives on 11 May 2017 and is intended to fully give effect to the Government’s commitment to progressively reduce the tax rate for companies regardless of their aggregated turnover.[6]

If passed, the ETP No. 2 Bill will progressively increase the aggregated turnover threshold from the 2019–20 income year. Table 2 shows the proposed changes made by the ETP No. 2 Bill from the 2019–20 income year.

Table 2: proposed measures in the ETP No. 2 Bill starting from the 2019–20 income year

Income year Aggregated turnover Company tax rate (%) Aggregated turnover Company tax rate (%)
2019–20 < $100 million 27.5 ≥ $100 million 30
2020–21 < $250 million   ≥ $250 million  
2021–22 < $500 million   ≥ $500 million  
2022–23 < $1 billion   ≥ $1 billion  
2023–24 No threshold   27.5
2024–25 No threshold   27
2025–26 No threshold   26
2026–27 and onwards No threshold   25

K Sanyal, Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017, Bills digest, 22, 2017–18, Parliamentary Library, Canberra, 2017, p. 8.

The ‘carries on a business’ test

Under the changes introduced by the ETP Act, an entity is a base rate entity, and therefore entitled to a reduced corporate tax rate, if:

  • the company ‘carries on a business’ and
  • its aggregated turnover is less than the relevant threshold (i.e. $25 million in the 2016–17 income year and increased to $50 million in the 2018–19 income year onwards).[7]

However, there are competing views on when a company ‘carries on a business’.

In March 2017, the Australian Taxation Office (ATO) issued Draft Taxation Ruling TR 2017/D2 Income tax: Foreign Incorporated Companies: Central Management and Control test of residency. Footnote [3] of the ruling stated:

... generally, 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.[8] (Citations omitted).

News reports indicated that the ATO’s broad interpretation of ‘carries on business’, although in a different context, would likely result in the lower corporate tax rate extending to a company even if it only derived ‘passive income’.[9] For example, a company that is a beneficiary of a discretionary family trust, where the trust generates its revenue from the letting of residential premises, may be eligible for the reduced corporate tax rate.[10]

The Minister for Revenue and Financial Services, Kelly O’Dwyer (the Minister) simultaneously released a statement confirming that it was not the Government’s intention for the reduced corporate tax rate to extend to passive investment companies.[11]

While reports suggested that the tax profession remained uncertain about the application of the reduced company tax cut to passive investment companies,[12] it was reported that the Government was considering a legislative amendment to remove the uncertainty.[13]

Some members of the tax profession consider that the ATO’s broad interpretation of ‘carries on a business’ is a fundamental change in the ATO’s position,[14] however this view is not uniform within the industry. For example, in submissions on the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 Exposure Draft, Allens Linklaters stated:

I note for completeness that I do not buy into the 'it was arguable the lower rate did not apply to passive investment companies even before this change' argument – such companies are in my view clearly carrying on an investment business.[15]

Exposure Draft

On 18 September 2017, the Treasury released the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 as an Exposure Draft (the Exposure Draft).[16] According to a statement from the Minister’s Office:

The exposure draft bill amends the tax law to ensure that a company will not qualify for the lower company tax rate if 80 per cent or more of its income is of a passive nature (such as dividends and interest).[17]

The Exposure Draft achieved this by introducing the concept of base rate entity passive income which deems certain income to be ‘passive income’.

The Exposure Draft received 18 submissions, all from the tax profession.[18] Although stakeholders welcomed the Government’s attempt to clarify the application of the reduced corporate tax rate, the Exposure Draft received criticism because:

  • the requirement that a corporate tax entity ‘carries on a business’ was retained, but guidance was not provided on the meaning of the phrase and
  • the change applied retrospectively from the 2016–17 income year, requiring taxpayers to amend their tax return.[19]
  • The Bill contains several changes as a result of stakeholder submissions on the Exposure Draft including:
  • the requirement that a corporate tax entity ‘carries on a business’ has been removed from the definition of base rate entity and
  • the Bill commences from the 2017–18 income year rather than the 2016–17 income year.

In her second reading speech, the Minister said:

Companies that derive more than 80 per cent of their assessable income in passive forms will not be able to access the lower company tax rate. The 'passive income' test replaces the 'carry on a business' test as a requirement for access to the lower company tax rate. The new test will have effect from the 2017-18 income year. It will make it easier for companies to determine which tax rate applies, thus providing companies with greater certainty about their taxation liabilities.[20]

A statement from the Minister’s office described the new requirements as a ‘bright line’ test which would replace the requirement that a company ‘carries on business’.[21]

The ATO also simultaneously released Draft Taxation Ruling TR 2017/D7 Income tax: when does a company carry on a business within the meaning of section 23AA of the Income Tax Rates Act 1986?, which considers the meaning of the phrase ‘carries on a business’ under section 23AA of the Rates Act, being the section that defines base rate entity. TR 2017/D7 confirms:

Whether a company is carrying on a business within the meaning of section 23AA of the ITR 1986 ultimately depends on an overall impression of the company's activities. However, where a limited or NL [No Liability] company is established and maintained to make a profit for its shareholders, and invests its assets in gainful activities that have both a purpose and prospect of profit, it is likely to be carrying on a business in a general sense and therefore to be carrying on a business within the meaning of section 23AA of the ITR 1986.[22] (Citations omitted)

If the Bill does not proceed through Parliament, the above interpretation may result in a larger number of companies accessing the reduced corporate tax rate than the Government appears to have originally intended.

Committee consideration

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bill.[23]

Senate Standing Committee for the Selection of Bills

The Senate Standing Committee for the Selection of Bills recommended that the Bill not be referred to any committee.[24]

Policy position of non-government parties/independents

While Labor has not expressly stated a position on the Bill, Matt Thistlethwaite (Shadow Assistant Minister for Treasury) was reported as saying, in relation to the ATO’s first ruling on the ‘carries on a business’ test:

For Kelly O’Dwyer to blame the ATO is not good enough, when it’s the Turnbull government going out of its way to deliver tax cuts to the most well-off.[25]

Senator Katy Gallagher (then Shadow Minister for Small Business and Financial Services and Manager of Opposition Business in the Senate) and Senator Chris Ketter (Chair of Economics References Committee and Deputy Chair of Economics Legislation Committee) have also queried why passive investment companies are only temporarily ineligible for the reduced corporate tax rate, up until the 2023–24 income year (discussed below).[26]

Position of major interest groups

All submissions on the Exposure Draft were made by members of the tax profession. Most submissions welcomed the Government’s initiative to provide clarity on the application of the reduced corporate tax rate.

Most submitters did not oppose the Bill, however, they considered that there were technical issues that needed to be resolved so as to avoid anomalous outcomes.[27] Some of the concerns raised by stakeholders have been addressed in the Bill, while others have not. Those concerns that have been addressed include:

  • applying the Bill’s amendments from the 2017–18 income year rather than retrospectively from the 2016–17 income year
  • providing clarity by removing the requirement that a company ‘carries on a business’
  • including net capital gains as opposed to capital gains in the proposed definition of base rate entity passive income and
  • including franking credits in the proposed definition of base rate entity passive income.

Those concerns that have not been addressed by the Bill include:

  • the deeming of certain types of income such as royalties, rent, and income from the disposal of certain capital assets as base rate entity passive income, where the entity is otherwise carrying on an active trading business[28] and
  • the requirement to trace the character of income received by a company through a partnership or trust that the company may not control.[29]

Both Chartered Accountants Australia and New Zealand (CA ANZ) and The Tax Institute in their submissions on the Exposure Draft, recommended a post-implementation review of the provisions to ensure the desired policy outcome was being achieved.[30] In CA ANZ’s view:

... the final legislation is unlikely to be ideal and may well create new issues and have higher compliance costs than are necessary.[31]

Financial implications

According to the Explanatory Memorandum, the Bill is expected to result in a small but unquantifiable gain to revenue.[32]

Enterprise tax plan

Under the ETP No. 2 Bill, from the 2023–24 income year a company will be eligible for the reduced corporate tax rate regardless of whether more than 80% of its assessable income is base rate entity passive income. Accordingly, the changes made by the Bill will only apply up until the 2023–24 income year if the ETP No. 2 Bill is passed.

At the Senate Economics Legislation Committee Supplementary Estimates on 25 October 2017, Senator Katy Gallagher asked the Treasury:

I would like to know, if you are able, the cost of allowing passive investment companies the ability to have a company tax rate of 25 per cent once the enterprise tax plan is implemented.[33]

The Treasury provided the following response to the Senator Katy Gallagher’s and Senator Chris Ketter’s[34] questions:

The Government’s policy, as announced in the 2016-17 Budget and reflected in the Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017, is to unify the company tax rate for all companies at 27.5 per cent in 2023-24 before progressively lowering the rate to 25 per cent by 2026-27. As a general rule, we do not comment on modelling that may or may not have been requested by the Government as this has the potential to reveal the deliberations of Cabinet.[35]

2016–17 income year

The Bill will apply from the 2017–18 income year rather than retrospectively from the 2016–17 income year as originally proposed in the Exposure Draft. It is not clear whether this will give rise to any financial implications, however the ATO has stated:

we understand that there has been some uncertainty about the 'carrying on a business' test and so we will adopt a facilitative approach to compliance in relation to the ‘carrying on a business’ test for the 2016-17 year. That is, we will not select companies, or their shareholders, for audit based on the company's determination of whether they were carrying on a business in the 2016-17 income year, unless that decision was plainly not reasonable.[36]

Senator Chris Ketter asked the Treasury on 25 October 2017 whether it had ‘an estimate of how many entities have, in effect, been given a tax amnesty for the 2015-16 and 2016-17 tax years?’, to which the following response was received:

Treasury does not have an estimate of how many entities would not have qualified for the lower company tax rate in 2015-16 and 2016-17 had the passive income test applied in those years instead of the ‘carrying on a business’ test.[37]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.

The Government considers that the Bill is compatible with human rights as it does not raise any human rights issues.[38]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights considered that the Bill does not raise any human rights concerns.[39]

Key issues and provisions

Meaning of ‘base rate entity’

Part III of the Rates Act, among other things, sets the rate of tax payable by companies. Under section 23, the rate of tax payable by a company is 30% unless it is a base rate entity, in which case the rate of tax payable is 27.5%.

The definition of base rate entity was introduced into the Rates Act by the ETP Act for the purposes of identifying those companies that are eligible for the reduced company tax rate, with effect from 1 July 2017.

Under existing section 23AA, an entity is a base rate entity in the 2017–18 income year if:

  • it ‘carries on a business’ and
  • its aggregated turnover for the year of income, worked out as at the end of that year, is less than $25 million.

Item 2 of Schedule 1 to the Bill will repeal the current definition of base rate entity and substitute a new meaning.

Under proposed section 23AA an entity will be a base rate entity if:

  • no more than 80% of its assessable income for the year of income is base rate entity passive income and
  • its aggregated turnover for the year of income, worked out at the end of the year, is less than $25 million.

In essence, the requirement that an entity ‘carries on a business’ will be removed and replaced with the requirement that no more than 80% of the entity’s assessable income for that year is base rate entity passive income.

Meaning of ‘aggregated turnover’

Aggregated turnover is defined under section 328-115 of the ITAA 1997 and includes:

  • an entity’s annual turnover and
  • the annual turnover of all entities that are affiliated or connected with the entity.[40]

An entity’s annual turnover is the total ordinary income that the entity derived in the ordinary course of ‘carrying on a business’ in the income year, subject to specific exclusions.[41]

An entity’s annual turnover differs from its assessable income because it does not include statutory income, being income that is deemed assessable because of a specific tax law.[42]

Although the Bill removes the ‘carries on a business’ test from the definition of base rate entity, it will still be relevant for determining what ordinary income is included in the entity’s annual turnover as well as the annual turnover of its affiliates or entities connected with it.[43]

Connected and affiliated entities

An entity’s annual turnover also includes the annual turnover of all entities that are affiliated[44] or connected with[45] the entity. TR 2017/D7 confirms that a company is likely to be ‘carrying on business’ in a general sense where it is:

...established and maintained to make a profit for its shareholders, and invests its assets in gainful activities that have both a purpose and prospect of profit.[46]

The result of this interpretation is that companies will likely have a higher aggregated turnover than they would have otherwise expected or considered prior to the issue of TR 2017/D7, because they will need to include the annual turnover of an affiliated passive investment company. In October 2017, the accounting and advisory firm BDO Australia noted:

Before the ATO published its view on passive investment companies carring [sic] on business, many taxpayers may have assumed that the annual turnover of the company and companies connected to it would not include their passive income because it was not thought to be ‘income received in the ordinary course of carrying on a business’. However, now the ATO’s view is that most companies are carrying on business, this ‘passive income’ would generally be included in the business income, so many of these companies will have to recalculate their aggregate turnover to include its ‘passive income’ in business income, which may result in the company being over the aggregate turnover threshold. This is an issue for entitlement to the lower tax rates for all of 2015/16 and 2016/17, 2017/18 and future years.[47] (Emphasis added).

It should also be noted that the TR 2017/D7 does not equally apply to other entities carrying on a business such as individuals and trusts. As noted in TR 2017/D7, the case law highlights that:

... companies have different underlying characteristics to individuals and trusts that lead to the conclusion that the same activities carried on by an individual or trust may not amount to the carrying on of a business, whereas they may when carried out by a company.[48]

Accordingly, an entity that is not a company but is nevertheless connected with, or an affiliate of a company, may not be considered to be carrying on a business where a company would otherwise be considered to be. In this sense companies will continue to face the challenge of determining whether or not their connected entities or affiliates are carrying on a business. If they are not carrying on a business, then their annual turnover will not contribute to the company’s aggregated turnover.

Increasing the threshold

Under the ETP Act, the aggregated turnover threshold will increase to $50 million from the 2018–19 income year onwards, while the corporate tax rate for companies that come within the threshold will be progressively reduced to 25% by the 2026–27 income year.

If the ETP No. 2 Bill is passed, the aggregated turnover threshold will increase to $100 million in the 2019–20 income year and then progressively increase until the 2023–24 income year, when all companies will be eligible for the reduced corporate tax rate regardless of their turnover.

Ratio of ‘assessable income’ to ‘passive income’

Proposed paragraph 23AA(a) of the Bill requires an entity to determine whether more than 80% of its assessable income for the year is base rate entity passive income. An entity’s assessable income is different to its aggregated turnover because:

  • an entity’s assessable income does not include the annual turnover of an affiliate or entity connected with it and
  • an entity’s assessable income includes statutory income whereas an entity’s annual turnover does not.

Table 3 illustrates the differences between the two concepts:

Table 3: key differences in the figures used in proposed paragraphs 23AA (a) and (b)

Aggregated turnover Assessable income
Grouping rules apply — the annual turnovers of entities connected with the company and its affiliates are aggregated with the company’s annual turnover No grouping rules apply — the company’s passive income and assessable income are measured on a standalone basis. Amounts derived by connected entities and affiliates are not taken into account
Aggregated turnover includes only ordinary income derived in the ordinary course of carrying on a business Assessable income includes both ordinary income and statutory income

Source: TaxBanter: Effective Tax Learning, ‘Proposed changes to eligibility for company tax cut’, TaxBanter website.

Stakeholders did not express any concerns regarding the 80% allowance of passive income.

Base rate entity passive income

Proposed paragraphs 23AB(a) to (g) of the Bill define the types of income which will be base rate entity passive income. It is comprised of a company’s assessable income that is any of the following:

  • distributions
  • franking credits attached to such distributions
  • non-share dividends
  • interest income, royalties and rent
  • a gain on a qualifying security
  • net capital gains
  • amounts that flow through a partnership or trust (either directly or indirectly) to the extent that the amounts are referrable to base rate entity passive income.

Distributions

Distributions made by a corporate tax entity to a company will be passive income under proposed paragraph 23AB(a). A corporate tax entity includes a company, a corporate limited partnership and a public trading trust.[49]

Generally, a distribution by a corporate tax entity represents the distribution of profits or gain to its members, being the shareholders, unit holder or partners. What constitutes a distribution by a corporate tax entity is defined by the tax laws.[50] For example, in relation to a company, a distribution will be a dividend or something deemed to be a dividend under the ITAA 1997 (dividends representing a distribution of a company’s profits to its shareholders).[51]

Dividends received by a company will be passive income unless they are non-portfolio dividends (within the meaning of section 317 of the Income Tax Assessment Act 1936 (ITAA 1936). Broadly, a non-portfolio dividend is a dividend paid to a company where the company has at least a 10% voting interest in the company paying the dividend.

The effect of the exclusion of non-portfolio dividends from the definition of base rate entity passive income is that dividends paid by related companies will not be treated as passive income by the company receiving them even if the entity paying them generates passive income.

This was addressed by multiple stakeholders in their submissions to Treasury on the Exposure Draft.[52] They noted that non-portfolio dividends would not be traced through a subsidiary company to determine whether the subsidiary’s income was comprised of more than 80% passive income. For example, BDO stated:

According to this definition, the non-portfolio dividend will not be treated as passive income even if it is paid out of passive income by the dividend paying company.[53]

Similarly, CA ANZ stated:

So, dividends paid by a wholly owned subsidiary to its holding company will not be passive income, regardless of whether the subsidiary carries on an active trading business or a predominantly passive investment business. We understand that the ED has intentionally been drafted this way.[54]

BDO considered that this may give rise to tax planning opportunities by channelling passive income through subsidiary companies:

Where the dividend paying company qualifies for the lower tax rate, the passive income of the dividend paying company would not be taken into account in the 80% test of the recipient company so there could be situations where a corporate group could qualify for the lower tax rate where more than 80% of the group’s income is passive income (provided the group’s aggregate turnover is below the relevant threshold). This provides an avenue for a company in receipt of passive income to channel it through subsidiary companies and, on payment of non-portfolio dividends by the subsidiaries, it ceases to be passive income in the hands of the holding company.[55]

Hayes Knight also noted that that the proposed paragraph allows dividends from passive income to be ‘refreshed’ as active income in the hands of a second company and that this was inconsistent with the way income is treated when it is received from a partnership or trust under proposed paragraph 23AB(g) (discussed below).[56]

While the exclusion of non-portfolio dividends may lead to corporate groups channelling their passive income through subsidiaries so that each entity is eligible for the reduced corporate tax rate, this practice could potentially give rise to the application of the General Anti-Avoidance Rules under Part IVA of the ITAA 1936.[57]

Franking credits

Under the imputation system, an Australian resident corporate tax entity can attach ‘franking credits’ to its distributions.[58] Franking credits reflect the amount of tax that a corporate tax entity has already paid. When an Australian resident company pays a dividend to a shareholder it may also pay a franking credit along with it. When the shareholder receives the dividend they must include both the dividend and the franking credit in their assessable income. The shareholder then uses the franking credit to reduce their individual tax liability.

This imputation system is designed to prevent company profits being taxed twice—first when the company pays tax on its profits and secondly when the shareholder pays income tax on the dividend and any other assessable income.

For example, if a shareholder receives a fully franked dividend of $70, they will also receive a franking credit of $30 (assuming the corporate tax rate is 30%). The shareholder includes $100 ($70 + $30) in their assessable income and the $30 franking credit is then used by the shareholder to reduce their tax liability.

Proposed paragraph 23AB(b) ensures that the franking credit attached to a distribution under proposed paragraph 23AB(a) is treated as passive income by the company receiving it. This is a necessary addition to the Exposure Draft to prevent anomalous outcomes—see CA ANZ’s example below.

Proposed paragraph 23AB(b) does not apply to non-portfolio dividends which means the franking credit attached to a non-portfolio dividend will not be treated as passive income by the company receiving it. The issue of franking credits is discussed further below under the heading ‘corporate tax rate for imputation purposes’ as part of the consequential amendments made by the Bill.

Non-share dividends

An equity interest in a company that is not solely a share is defined as a non-share equity interest.[59] Distributions from a non-share equity interest that do not constitute a non-share capital return are non-share dividends.[60]

Under proposed paragraph 23AB(c) a non-share dividend paid by a company to another company is passive income. This appears to be uncontroversial given that the general dividend assessment and franking provisions apply to a non-share equity interest and a non-share dividend in the same way they apply to a share and a dividend.[61]

Franking non-share dividends

While non-share dividends may also be franked, it is unclear whether the franking credit attached to a non-share dividend will constitute passive income under proposed section 23AB.

As noted above, a distribution under proposed paragraph 23AB(a), in relation to a company, means a dividend, or something taken to be a dividend under the ITAA 1997. Under proposed paragraph 23AB(b) franking credits ‘on such a distribution’ are passive income. However, a distribution does not appear to include a non-share dividend under the ITAA 1997. If this is the case, the franking credit attached to a non-share dividend may not be base rate entity passive income.

If a franking credit is not base rate entity passive income this could give rise to the anomaly described by CA ANZ in its submission on the Exposure Draft (although its example was in relation to a dividend rather than a non-share dividend):

So, a small business company which derives only dividends fully franked at either 30 or 27.5 per cent (or a mixture of both) will be a base rate entity as less than 80% of its assessable income will be passive income. For example, a small business company which in a year receives $70,000 dividend income, fully franked at 30%, from portfolio interests in listed companies will have 70% passive income, i.e. $70,000 passive income/$100,000 assessable income.[62]

If this is the case then a company that only receives non-share dividends will be a base rate entity because the franking credit attached to it will be assessable income but not base rate entity passive income.

Non-portfolio interest

Tax Astute has also noted that non-share dividends will always be passive income regardless of whether a non-portfolio interest is held.[63] Unlike paragraph 23AB(a) that deems a distribution to be passive income but excludes a non-portfolio dividend, a non-share dividend is treated as passive income even if the company holds a non-portfolio interest.

Interest income, royalties and rent

Proposed paragraph 23AB(d) deems interest income, royalties and rent to be passive income. While there are exceptions in relation to interest income, the majority of stakeholders expressed concern that proposed paragraph 23AB(d) would unfairly prejudice companies that carry on an ‘active trading business’ but nevertheless generate more than 80% of their assessable income from royalties or rent. Stakeholders responding to the Exposure Draft considered that this undermined the purpose of the Bill.[64]

In particular Deloitte considered that the policy intent is largely reflected in the definition of interest income and the treatment of dividends, however the inclusion of royalties, rent and capital gains (discussed below) could result in income from ‘genuine commercial activities’ being characterised as passive income.[65] Deloitte considered that the intended outcome of the Bill would be frustrated in the following situations:

  • an active business that develops intellectual property and derives royalty income
  • a business that derives rental income from a portfolio of commercial property assets that it manages as an active business and
  • capital gains that are realised on the disposal of active assets used to carry on an ‘active’ business.[66]

While this may be the case, it is arguable that the 80% passive income limit is quite a high threshold and leaves room for the company to offset its passive income so that it is still eligible for the reduced corporate tax rate.

Interest income

Interest income has the definition provided in the ITAA 1936, and includes income from interest on money lent, advanced or deposited, credit given, or any form of debt or liability. However, the term excludes among other things:

This means that the interest earned by banks and other money lending businesses will not be base rate entity passive income.[68] This appears to be consistent with the intent of the Bill, as such institutions are considered to be carrying on an ‘active trading business’.

The Tax Institute queried whether the definition of interest income would exclude from passive income the interest generated by an internal finance company used to finance a corporate group.[69] That is, would such income fall within the exception in paragraph (f) of the definition of interest income in the ITAA 1936, being:

... (f) interest derived by the taxpayer from carrying on a banking business or any other business whose income is principally derived from the lending of money.

If this is the case then the interest generated by the internal finance company on finance provided to group members would not be passive income.

It is also unclear in what circumstances interest will be derived by an entity from a transaction which is ‘directly related to the active conduct of a trade or business’—such interest will not be passive income.[70]

Royalties

While an expanded definition of the term royalty or royalties is contained in subsection 6(1) of the ITAA 1936, proposed paragraph 23AB(d) does not explicitly refer to this definition. Proposed paragraph 23AB(d) does however refer to the statutory definition of interest income—that is, the words ‘within the meaning of the Assessment Act’ immediately follow the term interest income. CA ANZ and The Tax Institute submitted that the drafting of this provision in the Exposure Draft indicated that the term ‘royalties’ took its ordinary meaning rather than the expanded meaning under the ITAA 1936.[71]

The Treasury has since confirmed that its view is that the term royalties has the same meaning as in the ITAA 1936. In response to Senator Katy Gallagher’s question taken on notice[72]  the Treasury provided the following Answer:

...The term ‘royalties’ is defined in subsection 6(1) of the Income Tax Assessment Act 1936 (the ITAA 1936). The Rates Act effectively incorporates this definition. That is, for the purposes of the definition of base rate entity passive income, the term ‘royalties’ has the same meaning as in the ITAA 1936.[73]

Section 4 of the Rates Act incorporates the ITAA 1936 and states that the Acts should be read as one. This indicates that the definition of royalties in the ITAA 1936 applies to proposed paragraph 23AB(d), however, it could be argued that the explicit reference to the defined term interest income only, indicates a contrary intention that the definition of royalties does not take its defined meaning under the ITAA 1936.

If the statutory definition does apply then a wider class of royalties will be deemed to be passive income. For example, the statutory definition deems an amount received for the use of, or right to use industrial, commercial or scientific equipment.[74]

In any event, stakeholders were concerned that a company could be carrying on an ‘active trading business’ where its income primarily consists of royalties that will be deemed to be passive income under proposed paragraph 23AB(d).[75] For example, this may capture a software developer that licences its software for use that extends beyond simple use.[76]

Some stakeholders considered that this issue could be mitigated by utilising the concept of tainted royalty income in section 317 of the ITAA 1936. The purpose of this would be to exclude royalties from being passive income where the royalty arises from something that originated with the company or was substantially developed, altered or improved by the company.[77] The stakeholders’ suggestion was not incorporated into proposed paragraph 23AB(d). This means all royalties will be passive income regardless of whether the company is carrying on an ‘active trading business’.

Rent

Rent is also deemed to be passive income under proposed paragraph 23AB(d). Rent is not defined in the tax laws and accordingly takes its ordinary meaning. When responding to Senator Katy Gallagher’s question taken on notice,[78] the Treasury has confirmed that ‘[t]he term ‘rent’ is not defined in the ITAA 1936 and therefore adopts its ordinary meaning.’[79]

Rent is generally the payment which a lessee or tenant contracts to pay the lessor or landlord for the use of premises or goods.[80]

Similar to the concerns raised in relation to royalties, stakeholders considered:

  • that the precise scope of the term ‘rent’ was unclear and
  • the inclusion of rent as passive income unfairly prejudiced an entity that carried on an ‘active trading business’ of leasing premises or goods.

The inclusion of ‘rent’ as passive income will likely exclude a company from the lower corporate tax rate where it carries on a business of leasing premises or goods. For example this may include a shopping mall operator, a storage business, or a machinery hire business.[81]

Consistent with Deloitte’s recommendation on royalties, it suggested (referring to the definition of tainted rental income in section 317 of the ITAA 1936) that rental income could be treated as active income unless derived by an associate.[82] This suggestion has not been incorporated into proposed paragraph 23AB(d).

The ATO also intends to release a Law Companion Guideline which will contain among other things, information on whether an amount of assessable income is derived from rent or royalties under proposed paragraph 23AB(d).[83]

A gain on a qualifying security

Proposed paragraph 23AB(e) treats a gain on a qualifying security as passive income. Broadly, a qualifying security is a security:

  • that has a term that will, or is reasonable likely to exceed one year and
  • where the sum of the payments (excluding periodic interest) will exceed the issue price.[84]

The treatment of the income arising from the disposal of a qualifying security appears to be uncontroversial. However, as already noted, in some cases it may be argued that the gain on the disposal of the qualifying security is part of an ‘active trading business’ rather than passive income.

Net capital gains

Net capital gains within the meaning of the ITAA 1997 are deemed to be passive income under proposed paragraph 23AB(f). Capital gains (or losses) arise upon the sale or disposal of capital assets such as real estate, shares, plant and equipment.

Stakeholders’ main concern with the inclusion of capital gains in the Exposure Draft has been addressed under proposed paragraph 23AB(f).[85]

CPA expressed concern that an entity could be subject to the higher corporate tax rate in a particular income year because it disposes of capital assets, notwithstanding that it otherwise carries on an ‘active trading business’.[86] This could arise in a number of situations, for example:

  • a distributor may decide to sell its distribution warehouse to realise the increased suburban land value
  • a start-up software developer may sell its software to another company
  • a primary production business may have limited income in a year whilst deriving passive income from an investment or
  • a business may be sold in its entirety.

In each scenario, the net capital gains that arises in the particular income will likely be passive income. This may have the effect of pushing an entity over the 80% threshold so that it is not entitled to the reduced company tax rate for the income year.

The CPA recommended that the Commissioner should be given discretion to assess the taxpayer at the reduced corporate tax rate, where the 80% test is temporarily breached.[87] This has not been incorporated into the Bill.

Stakeholders also consider that characterising income generated from the disposal of assets used in the carrying on of an ‘active trading business’ as passive income is inconsistent with the purpose of Bill.[88]

Tracing through partnerships and trusts

Under proposed paragraph 23AB(g) the passive income that a company receives through one or more interposed trusts or partnerships will retain its character for the purposes of determining whether the amount is passive income. For example, as stated in the Explanatory Memorandum:

if an amount derived by a trust is, for example, a dividend (other than a non‑portfolio dividend) which passes from the trust through one or more interposed trusts to a beneficiary that is a corporate tax entity, then the amount will be base rate entity passive income of the corporate tax entity because the trust distribution is indirectly referable to the dividend of the original trust.[89] (Emphasis added).

The purpose of proposed paragraph 23AB(g) is to ensure that a company which sits at the end of a chain of trusts or partnership cannot access the lower corporate tax rate, where the income generated up the line is otherwise base rate entity passive income under proposed section 23AB.

Stakeholders are primarily concerned that proposed paragraph 23AB(g) will create additional compliance obligations, be complex in its operation, and in some cases may be impossible for a company to comply with.[90] For example, a corporate tax entity may be unable to trace through a partnership or trust in order to determine the source of the income where it does not exercise a sufficient level of control over the upstream trust(s) or partnership(s).[91]

Hayes Knight also submitted that the requirement to trace income through a partnership or trust under proposed paragraph 23AB(g) was inconsistent with the exclusion of non-portfolio dividends from constituting passive income under proposed paragraph 23AB(a).[92] This is because proposed paragraph 23AB(g) requires a company to determine whether an amount of income it has received is referable to an amount that is base rate entity passive income. However, a non-portfolio dividend will never be base rate entity passive income even if it is referable to passive income of the entity paying it because of the operation of proposed paragraph 23AB(a).

Non-portfolio dividends

In the case of a beneficiary of a trust, it is unclear how a non-portfolio dividend will be treated. According to the Explanatory Memorandum (as extracted above) a non-portfolio dividend that passes through a trust will not be passive income. However, as BDO has noted, the definition of non-portfolio dividend requires the dividend to be received by a company.[93] Accordingly, a dividend cannot be paid to a trust and constitute a non-portfolio dividend, rather it will be a distribution under proposed paragraph 23AB(a) which is passive income.

2023–24 income year onwards

Items 3 to 5 of Schedule 2 to the Bill repeal the definition of base rate entity passive income from the Rates Act with effect from the 2023–24 income year.

This is to give effect to the Government’s commitment to reduce the corporate tax rate to 25% for all corporate tax entities by the 2023–24 income year. The commencement of this part is contingent on Part 5 of Schedule 1 to the Treasury Laws Amendment (Enterprise Tax Plan No. 2) Act 2017 commencing.

If the ETP No. 2 Bill is passed as currently drafted, the corporate tax rate will be 27.5% in the 2023–24 income year for all companies regardless of their aggregated turnover. This means that there will be no need to identify an entity that is a base rate entity, and accordingly the definition of base rate entity passive income will be superfluous.

As noted above, Senator Katy Gallagher questioned the Treasury on the policy intent of the Bill during the Senate Economics Legislation Committee Supplementary Estimates on 25 October 2017. In particular, Senator Gallagher questioned why passive investment companies are temporarily ineligible for the reduced corporate tax rate, with the following exchange taking place:

Senator GALLAGHER: ... why is the government treating them [passive investment companies] differently for the purposes of the payment for the company tax rate? I get the different activity, but why are they being treated differently?

Mr Raether[94]: It goes to a broader policy objective of supporting active businesses and jobs and growth.

Senator GALLAGHER: The current enterprise, the full enterprise tax plan, as envisaged by the government, proposes that the passive investment companies will be eligible for the 25 per cent tax rate with the full implementation of the enterprise tax plan. That raises the question: why do you deny passive investment companies a lower rate in the phasing in on the basis that they are not generating jobs and growth, but allow them to have the rate at 25 per cent at the end for entities of all sizes? I guess that is a question to you.

Senator Cormann: I will take the question on notice and I would ask the Treasurer what he might be able to add to the answer that was provided by the Treasury officer.[95]

Similarly, Senator Chris Ketter asked the Treasury on 25 October 2017:

In response to Senate Estimates questions (25 Oct 2017), it was suggested that passive investment companies are less likely to actively invest in jobs and new capital. Does Treasury hold the view that one argument to deny eligibility for the lower tax rate for passive companies is that they are not as likely to be investing in new capital or directly creating jobs?[96]

The Treasury has provided the following response to the Senators’ questions:

Treasury’s economy-wide modelling suggests a cut in the corporate tax rate to 25 per cent would generate a sustained increase in the level of GDP of just over 1 per cent. The majority of the gains from a company tax cut are expected to flow to Australian workers as increases in real wages. This modelling did not differentiate between active and passive companies.

A direct consequence of a lower company tax rate is that all Australian companies will have more profits after tax. For active companies, this means they have more money available to invest in their own businesses. For passive companies, this means they have more money available to invest in other businesses.

The changes introduced by the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 will ensure that small and medium companies get access to the lower company tax rate first. These companies employ over 4.7 million Australians.[97]

Other provisions

The Bill also makes consequential amendments to the Rates Act and the ITAA 1997.

Corporate tax rate for imputation purposes

As noted above, a company may attach a franking credit to a dividend when it is paid to a shareholder, the franking credits reflecting the amount of tax that a company has already paid on its profits.

Item 1 of Schedule 2 to the Bill repeals the current definition of corporate tax rate for imputation purposes from subsection 995-1(1) of the ITAA 1997 and replaces it with a new definition that takes into account an entity’s base rate entity passive income in the previous year.

The following extract from the Explanatory Memorandum explains the importance of the consequential amendment to the definition of corporate tax rate for imputation purposes:

The amount of franking credits that can be attached to a distribution cannot exceed the maximum franking credit for the distribution (section 202-60 of the ITAA 1997). The maximum franking credit is worked out by reference to the corporate tax gross up rate, which is defined in subsection 995-1(1) by reference to the corporate tax rate for imputation purposes.

Corporate tax entities usually pay distributions to members for an income year during that income year. However, a corporate tax entity will not know its aggregated turnover, the amount of its base rate entity passive income, or the amount of its assessable income for an income year until after the end of that income year. Therefore, generally, for the purposes of working out its corporate tax rate for imputation purposes for an income year, a corporate tax entity must assume that:

  • its aggregated turnover for the income year is equal to its aggregated turnover for the previous income year;
  • its base rate entity passive income for the income year is equal to its base rate entity passive income for the previous income year; and
  • its assessable income for the income year is equal to its assessable income for the previous income year.[98]

As the company must assume that its aggregated turnover, base rate entity passive income, and assessable income are the same as in the previous year, if, in the 2016–17 income year the company would have been a base rate entity, then the company’s corporate tax rate for imputation purposes will be 27.5% in the 2017–18 income year. Conversely, if they were not a base rate entity, then the rate will be 30%. If the corporate tax entity did not exist in the previous year, its corporate tax rate will be the lower rate of 27.5% regardless of its figures in the previous year.

It should be noted that substantial amendments to the franking provision were made by the ETP Act. The Bills Digest for the originating Bill provides stakeholder views on the original amendment.[99] Further to this, CA ANZ stated in its submission on the Exposure Draft:

The proposed amendments do not address the ongoing concerns regarding the disparity between the company tax rate and the rate at which dividends may be franked.[100]

In a submission on the Exposure Draft, Allens Linklaters stated:

I assume it is obvious to the policy makers that this change appropriately allows passive investment companies which have significant accumulated franking credits up to 6 years to get those franking credits out to their shareholders at 30% (instead of at the reduced tax rate). Personally I am happy with that outcome.[101]

This submission acknowledges that under the current law, a passive investment company that is considered to be a base rate entity would be unable to get its accumulated franking credits out at the rate of 30%, but rather would pay them out to shareholders at 27.5%, resulting in the shareholders paying more tax. However, under this Bill, those passive investment companies will not be base rate entities as it is likely that more than 80% of their assessable income will be passive income. This means that the company will have the opportunity to distribute the franking credits to shareholders until the reduced corporate tax rate applies to all companies from the 2023–24 income year.

Conversely, if a company is a base rate entity then it will likely be unable to distribute its accumulated franking credits at a rate of 30% but rather at a rate of 27.5%.[102]

Concluding comments

The Bill is generally supported by stakeholders because it will reduce the uncertainty regarding when a company will be eligible for the reduced corporate tax rate by introducing a ‘bright line’ test. However as noted, stakeholders are concerned that the Bill arbitrarily deems certain income, such as rent, royalties, and gains on capital assets to be passive income, where in reality an ‘active trading business’ may be being carried on. To this extent, stakeholders consider that this is inconsistent with the purpose of the Bill of preventing passive investment companies from accessing the reduced corporate tax rate.

The changes implemented by the Bill are temporary and while it is the Government’s intention that all companies will have a reduced corporate tax rate from the 2023–24 income year, it does not appear that the Government has clearly stated the policy underpinning the Bill.

Further, the temporary nature of the changes made by the Bill is contingent on the successful passage of the ETP No. 2 Bill and as such, these changes could remain in force beyond the 2022–23 income year if the ETP No. 2 Bill is not passed.

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[1].         The Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 will increase this annual turnover requirement to $50 million from the 2018–19 income year onwards.

[2].         This consequential amendment is contingent on Part 5 of Schedule 1 to the Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 commencing. At the time of writing, that Bill was before the House of Representatives.

[3].         Parliament of Australia, ‘Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 homepage’, Australian Parliament website.

[4].         Australian Government, Budget measures: budget paper no. 2, 2016–17, pp. 40–1.

[5].         In the 2015–16 and 2016–17 income years, the reduced corporate tax rate applied to small business entities.

[6].         Parliament of Australia, ‘Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 homepage’, Australian Parliament website.

[7].         Section 23AA of the Rates Act and item 16 of Schedule 1 to the ETP Act.

[8].         Australian Taxation Office (ATO), TR 2017/D2 income tax: foreign incorporated companies: central management and control test of residency, ATO website, Draft taxation ruling, 2017, p. 2.

[9].         BDO, ‘Technical update: company and small business tax cuts and other matters’, BDO website, 4 April 2017; N Tabakoff, ‘ATO signals tax windfall for wealthy’, The Australian, 4 July 2017.

[10].      ATO, TR 2017/D7 Income tax: when does a company carry on a business within the meaning of section 23AA of the Income Tax Rates Act 1986?, ATO website, Draft taxation ruling, 2017.

[11].      K O’Dwyer, (Minister for Revenue and Financial Services), ATO tax ruling, media release, 4 July 2017.

[12].      See for example: J Mather, ‘Investors still in “limbo” over tax cut’, The Australian Financial Review, 22 August 2017; J Mather, ‘Company tax cut eligibility “mind-boggling”’, The Australian Financial Review, 11 July 2017; N Khadem, ‘ATO refuses to define eligibility for tax cuts’, The Sydney Morning Herald, 12 September 2017; TaxTalk – Insights: Corporate Tax, ‘On track for a company tax rate reduction?’, PwC, 28 April 2017, p. 2.

[13].      J Mather, ‘Government to intervene in company tax muddle’, The Australian Financial Review, 4 August 2017; Mather, ‘Investors still in “limbo” over tax cut’, op. cit.

[14].      See for example: ESV, ‘Companies tax cuts for passive investors’, ESV website, 25 July 2017; TaxTalk – Insights: Corporate Tax, ‘Confusion over eligibility for company tax rate reduction’, PwC, 13 July 2017 pp. 1–2.

[15].      Allens Linklaters, Submission to Treasury, Eligibility for the lower company tax rate, September 2017.

[16].      The Treasury, ‘Eligibility for the lower company tax rate’, The Treasury website, 18 September 2017.

[17].      K O’Dwyer, (Minister for Revenue and Financial Services), Excluding passive investment companies from the small business tax rate, media release, 18 September 2017; J Greber, ‘Tax cuts won't go to “bucket” companies’, The Australian Financial Review, 19 September 2017.

[18].      The Treasury, ‘Eligibility for the lower company tax rate’, op. cit.

[19].      Hayes Knight, Submission to Treasury, Eligibility for the lower company tax rate, 22 September 2017, p. 2; CPA Australia, Submission to Treasury, Eligibility for the lower company tax rate, 28 September 2017, p. 1; Crowe Horwath, Submission to Treasury, Eligibility for the lower company tax rate, 29 September 2017, p. 1; PwC, Submission to Treasury, Eligibility for the lower company tax rate, 29 September 2017, p. 4.

[20].      K O’Dwyer, ‘Second reading speech: Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017’, House of Representatives, Debates, 18 October 2017, p. 11030.

[21].      K O’Dwyer, (Minister for Revenue and Financial Services), Passive investment companies excluded from lower tax rate, media release, 18 October 2017.

[22].      ATO, TR 2017/D7, op. cit., p. 14.

[23].      Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 13, 2017, The Senate, 15 November 2017, p. 59.

[24].      Senate Standing Committee for the Selection of Bills, Report, 13, 2017, The Senate, Canberra, 16 November 2017, p. 3.

[25].      N Tabakoff, ‘Scurry to plug tax loophole for the wealthy’, The Australian, 5 July 2017.

[26].      Senate Economics Legislation Committee, Official committee Hansard, 25 October 2017, p. 91; Senate Economics Legislation Committee, Answers to Questions on Notice, Treasury Portfolio, Supplementary Budget Estimates 2017–18, Question A0296.

[27].      See for example: Pitcher Partners, Submission to Treasury, Eligibility for the lower company tax rate, 28 September 2017, p. 1; CPA, Submission, op. cit., pp. 1–2.

[28].      Greenwoods & Herbert Smith Freehills (G&HSF), Submission to Treasury, Eligibility for the lower company tax rate, 29 September 2017, p. 3; BDO, Submission to Treasury, Eligibility for the lower company tax rate, 29 September 2017, p. 4; PwC, Submission, op. cit., p. 4; Pitcher Partners, Submission, op. cit., p. 5.

[29].      Chartered Accountants Australia and New Zealand (CA ANZ), Submission to Treasury, Eligibility for the lower company tax rate, 29 September 2017, p. 6; The Tax Institute, Submission to Treasury, Eligibility for the lower company tax rate, 29 September 2017, p. 8; PwC, Submission, op. cit., p. 5; CPA, Submission, op. cit., p. 1; Hayes Knight, Submission, op. cit., p. 2.

[30].      CA ANZ, Submission, op. cit., p. 1; Tax Institute, Submission, op. cit., p. 11.

[31].      CA ANZ, Submission, op. cit., p. 1.

[32].      Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017, p. 3.

[33].      Senate Economics Legislation Committee, Official committee Hansard, op. cit., p. 92.

[34].      Senate Economics Legislation Committee, Answers to Questions on Notice, Treasury Portfolio, Supplementary Budget Estimates 2017–18, Question A0297.

[35].      Ibid.

[36].      ATO, ‘Reducing the corporate tax rate’, ATO website, last modified 2 November 2017.

[37].      Senate Economics Legislation Committee, Answers to Questions on Notice, Treasury Portfolio, Supplementary Budget Estimates 2017–18, Question A0290.

[38].      The Statement of Compatibility with Human Rights can be found at page 16 of the Explanatory Memorandum to the Bill.

[39].      Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 12, 28 November 2017, p. 96.

[40].      ITAA 1997, section 328-115.

[41].      Ibid., section 328-120.

[42].      Ibid., sections 6-5 and 6-10.

[43].      Annual turnover is the total ordinary income you derive in the income year in the ordinary course of carrying on a business. If you are not ‘carrying on a business’ then you will not have an annual turnover.

[44].      An affiliate of an entity is any individual or company that, in relation to their business affairs, acts or could reasonably be expected to act: according to the entity’s directions or wishes; or, in concert with the entity. Trusts, partnerships, and superannuation funds are not affiliates. See ITAA 1997, section 328-130.

[45].      Generally, an entity will be connected with a company if the company controls the entity, or is controlled by the entity; or, both the company and the entity are controlled by the same third entity. See ITAA 1997, section 328-125.

[46].      TR 2017/D7, op. cit., p. 14.

[47].      BDO, ‘Technical update: new company tax rate legislation and tax ruling opens way for tax refunds for many small investment companies’, 23 October 2017, p. 3; Tax Banter, Submission to Treasury, Eligibility for the lower company tax rate, 27 September 2017, p. 6.

[48].      TR 2017/D7, op. cit., p. 14.

[49].      ITAA 1997, section 960-115.

[50].      Ibid., section 960-120.

[51].      Ibid., Item 1 of the table in section 960-120.

[52].      See for example: CA ANZ, Submission, op. cit., p 4; Tax Institute, Submission, op. cit., p 5; Hayes Knight, Submission, op. cit., p. 2; Pitcher Partners, Submissions, op. cit., p. 3; BDO, Submission, op. cit., p. 2.

[53].      BDO, Submission, op. cit., p. 2.

[54].      CA ANZ, Submission, op. cit., p. 4.

[55].      BDO, Submission, op. cit., p. 2.

[56].      Hayes Knight, Submission, op. cit., p. 2.

[57].      BDO, ‘Technical update: new company tax rate legislation and tax ruling opens way for tax refunds for many small investment companies’, op. cit., p. 2.

[58].      ITAA 1997, section 202-5.

[59].      Ibid., section 995-1; ATO, Non-share equity interest’, ATO website, last modified 18 January 2017.

[60].      Ibid., sections 974-115, 974-120.

[61].      Ibid., sections 215-15, 215-20; ITAA 1936, sections 43B(1), 128AAA.

[62].      CA ANZ, Submission, op. cit., p. 4.

[63].      Tax Astute, ‘Snapshot: new corporate tax rate rules’, October 2017, pp. 4–5.

[64].      CA ANZ, Submission, op. cit., p. 5; Tax Institute, Submission, op. cit., pp. 6–7; Pitcher Partners, Submissions, op. cit., p. 4; G&HSF, Submission, op. cit., p. 1; BDO, Submission, op. cit., p. 2; Crowe Horwath, Submission, op. cit., p. 2, pp. 9–10; CPA, Submission, op. cit., p. 1; Deloitte, Submission to Treasury, Eligibility for the lower company tax rate, 26 September 2017, pp. 1–2.

[65].      Deloitte, Submission, op. cit., pp. 1–2.

[66].      Ibid., p. 2.

[67].      ITAA 1936, subsection 6(1).

[68].      Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017, p. 7.

[69].      Tax Institute, Submission, op. cit., p. 6.

[70].      ITAA 1936, subsection 6(1), paragraph (e) of the definition of interest income.

[71].      CA ANZ, Submission, op. cit., p. 5; Tax Institute, Submission, op. cit., p. 6.

[72].      Senate Economics Legislation Committee, Official committee Hansard, op. cit., p. 90.

[73].      Senate Economics Legislation Committee, Answers to Questions on Notice, Treasury Portfolio, Supplementary Budget Estimates 2017–18, Question Q0288, p. 2.

[74].      ITAA 1936, subsection 6(1), paragraph (b) of the definition of royalty.

[75].      CA ANZ, Submission, op. cit., p. 5; Tax Institute, Submission, op. cit., p. 6; BDO, Submission, op. cit., p. 2; Deloitte, Submission, op. cit., p. 2.

[76].      Wolters Kluwer, Australian Master Tax Guide, CCH Australia Limited, 2017, pp. 445–6.

[77].      Deloitte, Submission, op. cit., p. 2; Pitcher Partners, Submissions, op. cit., p. 4.

[78].      Senate Economics Legislation Committee, Official committee Hansard, op. cit., p. 90.

[79].      Senate Economics Legislation Committee, Question Q0288, op. cit., p. 2.

[80].      R Woellner et al., Australian Taxation Law, 26th eds., Oxford University Press Australia & New Zealand, p. 189; Crowe Horwath, Submission, op. cit., p. 9.

[81].      CA ANZ, Submission, op. cit., p. 5; Tax Institute, Submission, op. cit., p. 7; Crowe Horwath, Submission, op. cit., pp. 9–10; Deloitte, Submission, op. cit., p. 2.

[82].      Deloitte, Submission, op. cit., p. 2.

[83].      Senate Economics Legislation Committee, Question Q0288, op. cit., p. 3.

[84].      ITAA 1936, section 159GP.

[85].      The Exposure Draft referred to a ‘capital gain’ instead of a ‘net capital gain’, however this failed to take into account that a ‘net capital gain’ is included in a taxpayer’s assessable income rather than a gross capital gain. This is because proposed paragraph 23AA(a) requires an entity to calculate their base rate entity passive income as a percentage of their assessable income. Net capital gains are included in a taxpayer’s assessable income not gross capital gains so it would be inappropriate to include gross capital gains as base rate entity passive income. See: CA ANZ, Submission, op. cit., p. 6; Tax Institute, Submission, op. cit., pp. 7–8; PwC, Submission, op. cit., p. 4; Pitcher Partners, Submissions, op. cit., p. 6; BDO, Submission, op. cit., p. 3; Tax Banter, Submission, op. cit., p. 5; Corporate Seminars Australia, Submission to Treasury, Eligibility for the lower company tax rate, September 2017, pp. 1–2.

[86].      CPA, Submission, op. cit., pp. 1–2.

[87].      Ibid., p. 2.

[88].      G&HSF, Submission, op. cit., p. 3; PwC, Submission, op. cit., p. 4; Pitcher Partners, Submissions, op. cit., p. 5; BDO, Submission, op. cit., p. 4.

[89].      Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017, p. 8–9.

[90].      CA ANZ, Submission, op. cit., p. 6; Tax Institute, Submission, op. cit., p. 8; PwC, Submission, op. cit., p. 5.

[91].      CPA, Submission, op. cit., p. 1.

[92].      Hayes Knight, Submission, op. cit., p. 2.

[93].      BDO, ‘Technical update: new company tax rate legislation and tax ruling opens way for tax refunds for many small investment companies’, op. cit., p. 2.

[94].      Mr Raether is the head of the Corporate & International Tax Division in the Revenue Group in Treasury.

[95].      Senate Economics Legislation Committee, Official committee Hansard, op. cit., pp. 90–1.

[96].      Senate Economics Legislation Committee, Question A0294, op. cit.

[97].      Ibid.

[98].      Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017, pp. 12–13.

[99].      K Swoboda, Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, Bills digest, 24, 2016–17, Parliamentary Library, Canberra, 2016, pp. 28–9.

[100].   CA ANZ, Submission, op. cit., p. 6.

[101].   Allens Linklaters, Submission, op. cit.

[102].   See for example: J Mather, ‘Franking losses will open can of worms’, The Australian Financial Review, 20 July 2017; J Mather, ‘Wilson anger over franking “nightmare”’, The Australian Financial Review, 8 August 2017.

 

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