Tax Facts

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  • No tax cut for 'passive' companies

    In brief:    The reduced 27.5% corporate tax rate has applied since 1 July 2016 to companies that carry on business and have an aggregated turnover of less than $10M ($25M for the 2018 year of income). Exposure draft legislation has now been released to reduce the confusion about which companies would be taken to be carrying on business. However, rather than address that question, the draft legislation will apply the lower tax rate to companies that have aggregated turnover less than the specified threshold for the year and whose total assessable income comprises less than 80% of ‘passive income’.

    More:    Passive income for this purpose is to be defined as:

    •     dividends (but not those from holdings with voting rights of 10% or more); 
    •     non-share dividends by companies; 
    •     interest income, royalties and rent; 
    •     gains on qualifying securities; 
    •     capital gains; and 
    •     to the extent attributable to any of the above, amounts included in assessable income from a partnership or trust.

    The 80% passive income test is an annual one so must be determined each year. The threshold is arbitrary so some odd results are possible. For example, a corporate beneficiary may be eligible for the reduced rate on trust distributions attributable mainly to business income in the trust, provided that it carries on business itself and satisfies the 80% test overall. But a company carrying on business managing the rental of its commercial or residential properties would not. What constitutes carrying on business is still not defined. (Exposure Draft: Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017)

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    21 Sep 2017

    Topic: Income Tax

  • 'Lucky' error in trust distribution resolutions avoids tax on $13M

    In brief:    In addition to distribution resolutions by 2 trusts in this case, variation resolutions for each provided for additional distributions ‘should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust …’ Assuming each variation provision was authorised by the relevant trust deed, the Full Federal Court held that it made the trust distribution contingent (on whether the Commissioner disallowed a trust deduction or included an additional amount in assessable income). Consequently, the beneficiary taxpayer who had been assessed on adjustments to the net (taxable) trust income was not presently entitled to a share of trust income by the end of the relevant income year and was not liable for tax on amended assessments following audit by the ATO.

    More:    There were a number of issues in this complex case, which arose from ATO amendments made a number of years after the relevant income years. But the big takeaway is the impact of variation clauses relating to trust distributions. They typically serve no real purpose but create very significant potential problems. It was beneficial in this case that the beneficiary assessed had no present entitlement to the trust income, but ordinarily the result of that is a liability on the trustee for tax at the maximum individual rate. Variation clauses should consequently be avoided. (Lewski v Commissioner of Taxation [2017] FCAFC 145)

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    21 Sep 2017

    Topic: Trusts/Income Tax