Questionable policy outcome from new Bill

Date: 19 October 2017 

The Tax Institute believes the shift in focus from when a company is carrying on business to a bright line test around its passive income is an incomplete policy outcome. 

Senior Tax Counsel, Professor Deutsch said, “While the Bill resolves some issues in identifying the applicable corporate tax rate by eliminating the carrying on a business requirement for 2017/18 onwards, it adds its own set of complexities, for example in defining passive income”. 

“It is likely there will be a flurry of amended tax returns for companies that have lodged their 2016 and 2017 returns. The carrying on a business requirement is critical to secure the lower corporate tax rate for these income years. The circumstances in which a company can be said to carry on a business is as unsettled as ever with no additional guidance being provided by this Bill”. 

Given the ATO’s wider interpretation in draft TR 2017/D7 it is likely that many companies will seek to reopen and claim back tax paid for those years on the assumption that the higher corporate rate would apply. 

For the current year onwards, under the Bill companies would qualify for the reduced rate, provided that no more than 80% of its assessable income is passive income such as interest, dividends, royalties, rent and net capital gains. This implies that a company that receives only royalty or rental income is deriving only passive income even if, for example, it owns and actively manages a suite of 50 properties. 

Professor Deutsch says, “This whole saga is a good example of how not to develop tax policy. A move to reduce the corporate tax rate should have been a straight-forward exercise. Instead it has led to a plethora of rates cascading down over a number of years; inadequately articulated concepts of carrying on a business and passive income; problems with franking credit utilisation, and generally an enormous amount of wasted time and energy”. 

“The Government, and most particularly the Senate, has much to answer for in regard to the creation of this mess”, says Professor Deutsch. 

ENDS

For more information, please contact:

Professor Robert Deutsch, Senior Tax Counsel

Stephanie Conway, Media Relations Contact: 02 8223 0011

 

About The Tax Institute

The Tax Institute is Australia’s leading professional association and educator in tax. Its 12,000 members include tax agents, accountants and lawyers as well as tax practitioners in corporations, government and academia. The Tax Institute supports the tax profession through education and professional development and works to continually improve tax law and its administration.