- 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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