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Australia Clarifies Tax Rules For Passive Investment Companies

by Mary Swire, Tax-News.com, Hong Kong

18 October 2017


The Australian Government has introduced legislation that will clarify that passive investment companies cannot qualify for the small business company tax rate.

Australia's headline company tax rate is 30 percent. The small business tax rate was recently reduced from 28.5 percent to 27.5 percent, effective July 1, 2016. The maximum turnover threshold for this rate was increased from AUD2m (USD1.6m) to AUD10m for the 2016-17 year, and to AUD25m for 2017-18. The threshold will be AUD50m from 2018-19.

The Government has now announced that it will amend the tax law to ensure that a company does not qualify for the lower company tax rate if more than 80 percent of its assessable income is passive income – such as interest, dividends, or royalties.

This new "bright line" test will replace the previous requirement that a company be "carrying on a business."

The Australian Taxation Office (ATO) will release guidance on what constitutes the carrying on of a business. The ATO has advised the Government that it will adopt a "facilitative approach" to compliance with the "carrying on a business" test for the 2016-17 year. It will not select companies for audit based on their determination of whether they were carrying on a business in 2016-17, unless their decision is plainly unreasonable.

The amendment will apply prospectively from the 2017-18 income year. In the 2016-17 income year, a company will need to be carrying on a business and have a turnover of less than AUD10m to qualify for the 27.5 percent rate.

TAGS: compliance | tax | investment | small business | business | interest | royalties | law | corporation tax | audit | Australia | tax thresholds | small and medium-sized enterprises (SME) | legislation | tax rates | dividends

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