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The Treasury has introduced exposure draft legislation seeking to clarify whether the lower company tax rates (27.5%) will apply to passive investment companies, or only companies operating an active business.

When the Tax law was changed earlier this year, to reduce the tax rate for ‘small business companies’, there was a lot of conjecture as to whether the reduced tax rate would apply to passive investment companies and corporate beneficiaries, or just active businesses.

The Government’s view was that the law was not intended to apply to passive companies. However, due to the drafting of the legislation, the Australian Taxation Office was coy about how it would apply these rules because certain recent case law confirms that every company is established to carry on a business. It was therefore thought that the reduced rate should apply to all companies.

To put this matter beyond doubt, exposure draft legislation has been introduced to ensure that the lower corporate tax rate will only apply where:

  • the company carries on a business in the income year;
  • the aggregated turnover of the company for the income year is less than the aggregated turnover threshold for that income year; and
  • the company does not have passive income for that income year of 80 per cent or more of its assessable income for that income year.

Therefore, a passive investment company, or a corporate beneficiary that does not carry on an actual business, should not qualify for the lower company tax rate, but rather would pay tax at 30% of taxable income.

These laws are currently in draft form only, but if implemented will apply from 1 July 2016 (financial year ended 30 June 2017).

If you would like to discuss how the lower company tax rate may impact your company, please contact your usual Hanrick Curran advisor or alternatively, Jamie Towers, John Kotzur or Tim Taylor on 07 3218 3900.

Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.