As a result of the passage of the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 today, the Government has legislated to confirm which companies are eligible for the lower company tax rate.
From the 2017-18 income year, a ‘bright line’ test will determine eligibility for the lower company tax rate. Under the bright line test companies that receive more than 80 per cent of their income in passive forms will not be eligible for the lower company tax rate of 27.5 per cent.
This change creates a clear test for companies to determine their eligibility for the lower rate.
This legislation provides certainty about who qualifies for the lower company tax rate, by excluding passive investment companies which are taxed at the rate of 30 per cent.
The ATO will issue shortly a draft Law Companion Ruling to assist taxpayers to apply the new test. The draft Ruling will provide further detail about applying the passive income test and how to work out the amount of franking credits that can be attached to distributions.
Recently, the ATO issued guidance for companies and their shareholders to explain what should be done if a company has paid an incorrect amount of tax or franked at an incorrect rate. Practical Compliance Guideline (PCG) 2018/D5 sets out an administratively simple approach for companies to amend distribution statements.