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    Important for 2018 company tax returns & dividends - new rules about 27.5% rate

    In brief:    Parliament has finally passed the new rules about which companies qualify for the 27.5% tax rate. And these rules operate retrospectively from 1 July 2017, so apply to 2018 company tax returns and franked dividends paid in the 2018 year of income. It is no longer relevant whether or not a company carries on business – the only 2 criteria are that the company’s aggregated turnover is below the threshold ($25M for the 2018 year and $50M for 2019) and that no more than 80% of the company’s assessable income comprises ‘passive income’.

    More:    Passive income for this purpose is defined as:

    • distributions by corporate tax entities (but not dividends to a company holding voting rights of 10% or more in the company paying the dividend);
    • franking credits on those distributions;
    • non-share dividends from companies;
    • interest income (but not for banks and other specified financial institutions), royalties and rent;
    • gains on qualifying securities;
    • net capital gains; and
    • to the extent referable to any of the above, amounts included in the assessable income of a partner from a partnership or beneficiary from a trust.

    The test must be applied for each income year, so the tax rate for a company may change from year to year.

    So too for the tax rate used to calculate the maximum franking credits that may be applied to dividends. However, the tax rate for that calculation must be determined on the assumption that the aggregated turnover, passive income and assessable income are all the same as for the previous year of income. And, if the company did not exist in the previous year, then maximum franking credits must be based on the 27.5% rate.

    For the ATO’s draft guidance, see Draft Law Companion Ruling LCR 2018/D7 and Draft Practical Compliance Guideline PCG 2018/D5. (Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018)

    31 Aug 2018

    Topic: Income tax

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