The Australian Tax Office and the company tax rate for small businesses – what’s all the fuss about?

Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on facebook
Facebook

A key part of the Government’s Budget package last year was a reduction in company tax rates for small businesses. The Australian Tax Office (ATO) recently interpreted “small business” to include companies that simply generate ‘passive income’ from investments. The Government has responded that it did not have these types of entity in mind when it decided to introduce tax cuts for small businesses.

company tax

By Dr. Drew Donnelly, Compliance Quarter

Today we summarise the disagreement between the ATO and the Government over the tax rate.

Budget 2016: The tax enterprise plan

In Budget 2016, the Government unveiled a ten-year enterprise tax plan aimed at supporting jobs and economic growth, particularly through tax relief for small businesses. One aspect of this plan was an incremental reduction in the company tax rate for small businesses. For the 2016-2017 financial year this increment was to be from 28.5% to 27.5%.

Through legislation passed by the Government this year, the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 and the existing Income Tax Rates Act 1986, a small business is defined by whether it is:

  • carrying on a business for all or part of the income year, and
  • has an aggregated turnover of less than $10 million.

This means that whether or not an entity is a small business will rest on what it means to be “carrying on a business”.

Initially, in a draft ruling, ATO provided the following elaboration: “Generally where a company is established or maintained to make profit or gain for the shareholders it is likely to be carrying on business … this is so even if the company holds passive investments and its activities consist of receiving rents or returns on its investments and distributing them to shareholders.”

The Government’s response to ATO

Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP issued a press release on 4 July 2017, maintaining that ATO’s interpretation is not in line with Government policy:

“the policy decision made by the Government to cut the tax rate for small companies was not meant to apply to passive investment companies.”

“If any further direction is required on the Government’s policy intention by the ATO it will be provided by the Government.” (see http://kmo.ministers.treasury.gov.au/media-release/056-2017/).

ATO’s amended interpretation

Subsequently, ATO has amended its interpretation above very slightly. It now says that

“this is so [the entity will be “carrying on a business”] even if the company’s activities are relatively passive, and its activities consist of receiving rents or returns on its investments and distributing them to shareholders.”

So now the question for a small business is whether it is engaged in “relatively passive” activities. This leaves it considerably more open-ended for a business, and their accountants, to determine whether or not they are eligible for the tax-cut.

See the ATO’s latest draft advice.

But note that ATO has confirmed it is working on further guidance on this matter which will be released in August.

In the meantime, make sure you engage an accountant or tax consultant to determine which tax rate applies to your business.

More to explorer

Technicians installing photovoltaic solar panels on roof of house.

Compliance Quarter’s Submission to the AER’s Review of the Compliance Procedures and Guidelines

On 11 April 2024, Compliance Quarter put forward its submission on proposed changes to the AER Compliance Procedures and Guidelines. The AER is reviewing its Compliance procedures and guidelines, which set out the manner and form in which energy businesses in jurisdictions that have adopted the National Energy Retail Law must submit compliance information and data to the AER. We argue that there should be consideration of measures to incentivise early reporting of potential breaches. These may, for example, take the

person wearing foo dog costume

Obligations of Energy Retailers Regarding Best Offer Information

Energy retailers in Victoria have specific obligations under the Energy Retail Code of Practice to provide clear information to customers about their ‘best offer’ – that is, the plan that would minimize the customer‘s energy costs based on their usage history. The objective is to ensure small customers can easily understand whether they are on the retailer‘s best plan for them and how to access the retailer‘s best offer if not. One of the significant challenges in the energy sector (as in banking and elsewhere) is that customers

low angle photo of sydney opera house australia

Guide to the National Energy Retail Rules

The National Energy Retail Rules (NERR) are a set of rules that govern the sale and supply of electricity and gas by retailers to consumers in Australia, alongside the related National Energy Retail Law (NERL). The NERR came into effect on 1 July 2012 in Tasmania, the Australian Capital Territory, and the Commonwealth. South Australia followed on 1 February 2013, New South Wales on 1 July 2013, and Queensland on 1 July 2015. The NERR do not yet apply in

Leave a Reply

Your email address will not be published. Required fields are marked *