As 30 June rapidly approaches, taxpayers and their advisors face not knowing whether a 30% or 27.5% tax rate applies to certain companies for the 2018 income year.
A conservative approach is to plan on the basis the Tax Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 (the Bill), receives assent and applies from 1 July 2017, which will deny the lower 27.5% corporate tax rate to corporate tax entities with less than $25 million of turnover that derive predominantly (80% or more) passive income.
For family groups with trusts with corporate beneficiaries the company will need to know the character of the trust distribution to determine whether the company pays tax at 27.5% or 30% (assuming that the company meets the turnover threshold).
What should you do by 30 June 2018?
Corporate taxpayers who may be subject to the Bill should:
- ensure accounting systems and procedures allow the trust to identify the various types of income (together with associated deductions);
- confirm the trust deed allows the trust to stream income (beyond franked dividends and capital gains) to beneficiaries;
- ensure pro forma resolutions include sufficient information to enable a corporate beneficiary to determine the distribution for company tax rate eligibility;
- ensure unpaid present entitlements with corporate beneficiaries held on sub-trust under PS LA 2010/4 are considered; and
- confirm no new bucket companies are required.
Watch the math
Eligibility for the 27.5% rate requires a company to compare “base rate entity passive income” (a gross amount) with assessable income.
For distributions from a trust (not being franked dividends or capital gains), the assessable income of the company will include the company’s share of the net income of the trust. Therefore, the trustee will need to identify the deductions that relate to base rate entity passive income (forming part of net income) and, if a deduction cannot be traced to a specific income stream, a reasonable basis for apportionment, for the company to determine whether it satisfies the test for the lower company tax rate.
For example, a family group includes a trust and a company. The company earns $250,000 of active income and the trust earns $850,000 of rent with $100,000 of deductions. If the trust distributes 100% of the income of the trust to the company, the company will have assessable income of $1m (that is, $250,000 + $750,000), but the company will not be eligible for the lower company tax rate because passive income (rent) will be 85% of its assessable income. Should the group incorporate a new company so that the trust can distribute only so much income that the first company is eligible for the lower rate and the second company pays 30% on the excess?