In Australia, the full company tax rate is 30 per cent, and the new lowered company tax rate is 27.5 per cent. Until today, it has been unclear what criteria determines if a business is eligible for the lower corporate tax rate.
The ATO has now released TR 2019/1, replacing the previous draft TR 2017/D7, setting out the Commissioner’s view on when a company carries on a business for accessing the lower corporate tax rate of 27.5 per cent in the 2015-16 and 2016-17 income years.
You can read more about the fine print of the changes here.
The technical details
According to the ATO, the key indicators in what amounts to carrying on a business are:
- whether the person intends to carry on a business.
- the nature of the activities, particularly whether they have a profit-making purpose.
- whether the activities are repeated and regular, organised in a business-like manner, including the keeping of books, records and the use of a system.
- the size and scale of a company’s activities including the amount of capital employed in them, and whether the activity is better described as a hobby, or recreation.
The important take-aways
There are a variety of ways to determine eligibility, according to HLB Mann Judd's partner Peter Bembrick. Those who are unsure of how the requirements apply to them should seek professional advice.
"It is entirely possible that a company could have become entitled to use the lower tax rate in the 2016 or 2017 years because it was carrying on a business and below the relevant turnover threshold, but on applying the BRE (base rate entities) rules for the 2018 or later years it may be decided that the 30 per cent tax rate should now be applied going forward,” said Mr Bembrick.
“This may require careful examination not only of the tax rate that has been applied to its taxable income in each of the years, but also the franking rates that have been applied to dividends paid during those years," he said.
“While some of the wording in the ruling has been tidied up from the draft, the substance of the ATO’s views is largely unchanged, and there are just a couple of areas where the extent of application of the concept of ‘carrying on a business’ has been clarified," he said.