With the new tax ruling, there is more clarity when it comes to determining if a company can access the lower corporate tax rate.
The Australian Taxation Office (ATO) has released TR 2019/1, taking the place of the previous draft TR 2017/D7. It sets out the Commissioner’s view on when a company carries on a business for accessing the lower corporate tax rate of 25% in the 2015-16 and 2016-17 income years, as well as determining the franking percentage to be applied to dividends paid to shareholders.
Under section 328-110 of the ITAA 1997, a company is a small business entity if, in addition to satisfying other criteria, it carries on a business. The Ruling considers when a company carries on a business within the meaning of a small business entity in section 23 of the ITRA 1986 as applicable in the 2015-16 and 2016-17 income years, and section 328-110 of the ITAA 1997.
The courts consider the following key indications when distinguishing whether the activities carried on by an entity amount to the carrying on of a business:
· 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.
Under the new law, a corporate tax entity will be taxed at the lower corporate tax rate 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, and
· its aggregated turnover is less than the relevant threshold ($25 million in the 2017-18 income year; $50 million from the 2018-19 income year).
To find out more about the new tax ruling, watch Effective PD’s webinar on TR 2019/1. The webinar will also cover rulings on CGT small business concessions and income tax. To subscribe, visit www.effectivepd.com.au. Effective PD offers an innovative way for busy accountants to be on top of their game with continuing professional development in a brief, flexible and easy way.
