Tax rates for companies just got more complex

The laws have now passed.

Under the new law, a corporate tax entity will be taxed at the lower corporate tax rate (27.5%) if it is a base rate entity. A corporate entity will be a base rate entity if:

no more than 80% of its assessable income is BREPI Base Rate Entity Passive Income [1], and

its aggregated turnover[2] is less than the relevant threshold ($25 million in the 2017-18 income year; $50 million from the 2018-19 income year).[3] A corporate tax entity's aggregated turnover is the sum of their ordinary income and the ordinary income of any connected or affiliate entity.

What constitutes BREPI is a list to consider.

Some potential restructuring opportunities for tjose affected.

 

Interesting - thanks for sharing

 

Does the reduced corporate tax rate apply to holding companies where the holding company holds 100% of the shares in a company "carrying on a business"? Read the attached article and it doesn't seem clear (could be the article is out of date).

Company tax cuts: What Rate of Tax Does My Company Pay? | TaxBanter

 

Totally different analysis. The question for the company paying the dividend is what is the corporate imputation rate to use.

That then determines what franking credits are received by the holding company.

That is an even more complex discussion. The franking rate is determined by whether the previous years turnover is less than 25m and whether the brepi was less than or more than 80% in the previous year to work out the franking rate.

And it doesn't factor in if the group has been tax consolidated.

 

So assume the trading company paying the dividend has turnover less than $25M and less than 80% of its income is BREPI and is therefore eligible for the reduced tax rate. Does the holding company get the same concession? The article is unclear regarding the scenario: "Holding company that only holds shares in its subsidiaries"

 

is the holding company a base rate entity ?

 

That's the bit that isn't clear: The issue is whether the company is carrying on a business in relation to its passive investments. This fundamental question has not been addressed by the proposed changes. If the ATO guidance is taken to mean that the company is carrying on a business of investment, it can access the 27.5 per cent rate as non-portfolio dividends received from a subsidiary are not BREPI. If the company is not carrying on a business, it is taxed at 30 per cent regardless of whether it satisfies the other two conditions.

 

Its all been addressed in the revised enactments. Have you read the explanatory memorandum ?

The carrying on a business has been removed in the most recent legislation. That requirement under the intial proposal is gone.

The explanatory memorandum at paragraph 1.4 states

These amendments will modify the requirements that must be satisfied for a corporate tax entity to qualify as a base rate entity by replacing the carrying on a business test with a passive income test. Under the passive income test, companies that are generating predominantly passive income will not be eligible for the lower corporate tax rate

Read the law first not blogs as they might not be current.

Explanatory memorandum says non portfolio dividends are not BREPI. Then go to legislation shat is a non portfolio dividend.

A non-portfolio dividend (as defined in section 317 of the Income Tax Assessment Act 1936 (ITAA 1936)) is a dividend paid to a company with a voting interest in the payee company. The voting interest must amount to at least 10% of the voting power (within the meaning of section 334A of the ITAA 1936) in the company paying the dividend

In fact at paragraph 1.11 of the explanatory memorandum it states

Consequently, dividends derived, for example, by a holding company which are made by a wholly-owned subsidiary company will not be base rate entity passive income of the holding company.

An old partner i worked with years ago drilled into me the discipline of reading the legislation and explanatory memorandum before reading anything else.

Screenshot_20180901-212324_LinkedIn by MikeLivingTheDream posted 1st Sep, 2018 at 7:23 PM

 

Lots of people will be caught out on this by reading old blog posts I imagine.

 

Not if they consult me

 

Or any other tax adviser perhaps,?

 

Yes ill include you and @Ross Forrester