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Australian Parliament Passes Legislation on Eligibility for Reduced Corporate Tax Rate — Orbitax Tax News & Alerts

On 23 August 2018, a revised version of the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 was passed by both houses of the Australian Parliament. The legislation amends the Income Tax Rates Act 1986 to provide that a corporate tax entity (base rate entity) would only qualify for Australia's reduced corporate tax rate for an income year if:

  • no more than 80% of the corporate tax entity’s assessable income for that income year is base rate entity passive income; and
  • the aggregated turnover of the corporate tax entity for the income year is less than:
    • for the 2017-18 income year — AUD 25 million;
    • for the 2018-19 income year — AUD 50 million.

For this purpose, base rate entity passive income is assessable income that is any of the following:

  • a distribution by a corporate tax entity, other than a non-portfolio dividend;
  • franking credits attached to such a distribution;
  • a non-share dividend made by a company;
  • interest (or a payment in the nature of interest);
  • a royalty;
  • rent;
  • a gain on a qualifying security;
  • a net capital gain;
  • an amount that is included in the assessable income of a partner in a partnership or a beneficiary of a trust estate to the extent that the amount is referable (either directly or indirectly through one or more interposed partnerships or trust estates) to another amount that is base rate entity passive income.

With respect to distributions, a distribution made by a corporate tax entity includes dividends and amounts that are taken to be dividends under the income tax law, made by a company. For the exclusion of non-portfolio dividends, a non-portfolio dividend is, broadly, a dividend paid to a company where that company has a voting interest amounting to at least 10% of the voting power in the company paying that dividend. Consequently, dividends derived, for example, by a holding company that are made by a wholly-owned subsidiary company will not be base rate entity passive income of the holding company.

With respect to interest, certain exclusions are provided, including that interest (or a payment in the nature of interest) does not include an amount derived by:

  • an entity that is a financial institution, which includes a bank (such as an authorized deposit-taking institution) and a co-operative housing society;
  • an entity that is a registered entity within the meaning of the Financial Sector (Collection of Data) Act 2001 that carries on a general business of providing finance on a commercial basis;
  • an entity that holds an Australian credit license or is a credit representative of another entity that holds an Australian credit license;
  • an entity that is a financial services licensee whose license covers dealings in certain financial products that are securities, or is an authorized representative of such a financial services licensee; or
  • an entity that is of a kind mentioned in a legislative instrument that may be specified by the Minister

Further, interest (or a payment in the nature of interest) does not include an amount derived by an entity that is a return on an equity interest in a company.

The measures of the Bill apply from the 2017-18 income year.

Note – The revised explanatory memorandum for the legislation makes mention of the planned increase in the base rate entity threshold, although this increase will not take place as recently announced by the government ({News-2018-08-24/A/2-previous coverage}).