Company tax changes ... Again ... What you need to know

As we all know, last week proved to be yet another chaotic week in Australian politics, resulting in a new Prime Minister, with Scott Morrison appointed as the new leader of the Federal Liberal Party (and hence PM) after Malcolm Turnbull had been deposed.

But that’s not all that happened! There was another significant event that occurred last week that we’d like to alert you to.

Prior to the leadership turmoil that ensued, Parliament passed legislation which will limit the scope and application of the new company tax rate of 27.5%, for the 2017/2018 financial year onwards. The former PM, had also already previously announced that the Government was to “veto” it’s earlier planned initiative to further reduce company tax in future years (i.e. to reduce the corporate tax rate, progressively down to as low as 25% for eligible companies), having succumbed to political pressures.

Notwithstanding the back-flip in relation to proposed additional reductions in the company tax rate (beyond the 2018 income year), the legislation passed last week clears up the conjecture that had existed as to the application of a 27.5% vs 30% company tax rate for the financial year commenced from 1 July 2017. The uncertainty on the tax rate that applies to companies for the year ended 30 June 2018 and beyond, and the maximum franking rate on dividends paid has now been removed.

The new legislation prevents a company from applying the lower 27.5% company tax rate if more than 80% of its income is passive in nature. The new legislation will affect the majority of investment companies, resulting in those types of companies being subject to a 30% tax rate (once again). This also has an impact on the maximum franking rate that applies to dividends paid by companies in the 2018 income year onwards.

By way of background, under the old rules, a company was subject to a 27.5% tax rate if it “carried on a business” and the aggregated turnover of the company and certain related parties was less than $25m.

This has now been replaced with a “base rate passive income” test (i.e. if > 80% of a company’s income generated is considered passive, then a 30% corporate tax rate will apply). On face value, the initial assumption by many, in relation to this new test are that their investment company will fall within a 30% tax rate regime. However, depending on the particular circumstances, this assumption may be incorrect.

More specifically, there are exclusions to the “base rate passive income” test, which could be relevant, and should be reviewed in the context of your circumstances.

For example, the “base rate passive income” criteria excludes:

• Non-portfolio dividends – i.e. dividends received from subsidiary companies, provided that the parent company (or holding company) has at least 10% of the voting power in the company paying the dividend; hence the holding company structure will continue to be eligible for the reduced 27.5% company tax rate, subject to having also satisfied the $25m aggregated turnover test (which continues to apply); and
• A corporate beneficiary that receives a distribution from a Trust that carries on a business, will pass the passive income test and be taxed at 27.5% as that income retains that “business” character. However care is required to review the quantum and character of any additional types of income also derived by that corporate beneficiary.

We will contact you prior to finalising your 2018 company income tax return, to arrange a time to discuss how these changes may affect you and review your planning in respect of the recently ended 30 June 2018 year, and beyond.

In the meantime, if you have any questions regarding this matter, please do not hesitate to contact us.