Tax & Accounting Blog

Corporate beneficiaries and corporate tax rate: How might the new legislation be applied?

Blog, Business Tax, Checkpoint, Corporations, Organisations, Tax January 23, 2018

On 18 October 2017, the Government introduced Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 into Parliament.  The Bill contains amendments to s 23AA of the Income Tax Rates Act 1986 to clarify which entities will be eligible for the reduced corporate tax rate for the 2017-18 income year and subsequent income years. It is still before the House of Reps awaiting debate.

The Bill was introduced to address the interpretive difficulties under the existing law, whereby a company carrying on a business could be eligible for the corporate tax rate cut.  The ATO has taken a preliminary view that almost all companies with a view and expectation of profit are taken to be carrying on a business – see Draft TR 2007/D7.  Accordingly, this interpretation would result in “passive” investment companies having access to the lower corporate tax rate.

The Bill would change this threshold requirement, by requiring the company to determine that 80% or less of its assessable income is not base rate entity passive income (“passive income”).  Within that definition, s 23AB(d) of the Rates Act defines interest income as follows.

Base rate entity passive income is assessable income that is any of the following:  … (d) interest income (within the meaning of the Assessment Act) … “.

In an article in Thomson Reuters 2018 Weekly Tax Bulletin Issue 3, Alexis Kokkinos, Partner, Pitcher Partners, considers this definition of “interest income” in the context of amounts derived by a corporate beneficiary under complying Division 7A loan agreements and complying PSLA 2010/4 investment agreements. In particular, the article considers whether a corporate beneficiary, which merely derives Division 7A interest income, can access the lower corporate tax rate under the amending legislation.

In his article, Alexis considers an example where a corporate beneficiary has received distributions of trust income in previous years, which is then lent to another entity under either a Division 7A loan or as a complying investment agreement.

That is, the corporate beneficiary either places the unpaid entitlements on complying Division 7A loan terms (whereby interest is derived by the corporate entity under those loan agreements) or investment agreement terms that are in compliance with PSLA 2010/4 and PCG 2017/13 (whereby interest is derived in respect of those investment agreements in accordance with para 61 of the PSLA).

For the purpose of the examples considered in the article, it is assumed that the income year is 30 June 2018 and that the corporate entity does not derive any additional income during the income year in question (other than interest outlined in the previous paragraph).  It is also assumed that the aggregated turnover of the corporate entity is less than $25 million for 30 June 2018.

The article also analyses the situation where a corporate beneficiary elects to form a tax consolidated group. Alexis posits that it would be interesting to understand the ATO view on this alternative interaction.

Read this insightful analysis in full in Issue 3 for 2018 of the Weekly Tax Bulletin.