New Rules on the Reduced Corporate Tax Rate
Legislation has recently been passed by Parliament that changes the rules for accessing the reduced corporate tax rate of 27.50% for the 2018 and subsequent tax years. Basically, a company must be a “base rate entity” to be eligible for the reduced corporate tax rate. Under the new rules, a company is a base rate entity if the following requirements are met:
1. no more than 80% of the company’s assessable income for income year is ‘base rate entity passive income’; and
2. the aggregated turnover of the corporate tax entity for the income year is less than the aggregated turnover threshold ($25 million in the 2017-18 income year; $50 million from the 2018-19 income year).
Base rate entity passive income basically refers to income earned from various investment activities, such as dividends (but not non-portfolio dividends, see below), franking credits, non-share dividends, interest, royalties, rent, a gain on a qualifying security, a net capital gain, a trust distribution or a partnership’s share of profit where the underlying trust’s or partnership’s income is also passive income.
A dividend is a non-portfolio dividend where a company shareholder has a 10% or more voting interest in another company that pays the dividend. Therefore, a dividend paid by a wholly owned subsidiary to its parent company is a non-portfolio dividend and will not be counted toward the 80% passive income test.
The Australian Taxation Office (ATO) has issued draft ruling LCR 2018/D7 to provide guidance on the meaning of base rate entities and base rate entity passive income. In the draft ruling, the ATO also provides examples on characterisation of the share of net income from a trust and the apportioning of expenses directly referable to the trust income in working out the base rate entity passive income.
Importantly, under the new rules, companies are no longer required to be carrying on a business to be a base rate entity. Therefore, the “carrying on a business” requirement only applies to companies accessing the reduced corporate tax rate in the 2015-16 and 2016-17 income years.
Where a company qualifies as a base rate entity, the maximum franking credit rate is generally the reduced rate of 27.50%. Therefore, this will have an impact on companies that declare or pay franked dividends during the income year. Depending on the circumstances, the shareholders may have to pay more top-up tax or receive less refunds due to the reduced imputation credits attached to the dividends.
The new rules will apply from the 2017-18 income year. If you have any queries on the subject, please contact Peter Hong.
The ATO’s recent activity in the GST space has been focussed on what they term “GST Streamlined Assurance Reviews”. These are, in effect, comprehensive GST audits. Based on our experience, it is likely that groups who operate in the property industry (an industry the ATO tends to review), and newly formed private GST Groups will be targeted for these “Reviews”.
The information the ATO will review includes:
- Organisational structure – latest GST reporting structure; ABN/CAN of each entity;
- Business activities of each entity;
- Details of acquisitions, mergers and disposals of any business entities within Australia in the review.
- BAS preparation process – a copy of the BAS preparation manual or written procedures including who prepares and reviews the BAS prior to lodgement; details of review and authorisation processes;
- Tax governance and controls framework – Provide the most recent documentation outlining the business tax governance and risk management including tax governance manuals, guidelines or policy available to staff;
- Tax risks flagged to the market – the business is asked to describe its processes to identify tax risks flagged by the ATO (or other bodies) to the market; and
- Significant and new business transactions.
Whilst they will request this information, anything provided prior to an audit and disclosed voluntarily is likely to mitigate any penalties that may be imposed. At this early stage, the ATO says its focus is on information and documents that should be readily available. We take this to mean the ATO will gather information from BAS lodgements, ASIC, ASX and State Revenue to determine which entities it will be reviewing.
If you would like to discuss how we can provide a comprehensive GST risk review for your client(s), please contact Mimi Ngo.
AASB 112 – Income Taxes
As we wrap up the first part of the reporting season for listed entities and now start on the September/October month-ends reporting for explorers, other public unlisted companies and large proprietaries, we would like to highlight some key challenges that arise in preparing tax-effect accounting in compliance with AASB 112 – Income Taxes and UIG 1052 – Tax Consolidation Accounting.
Despite having been in force since 2005, the AASB 112 continues to be a challenge for many accountants as it is complex and unique in the recognition and disclosure of income tax expense. Any accountant attempting to tackle this would require both a comprehensive understanding of the AIFRS standard and the ever-evolving income tax law.
Further, audit firms are prohibited under APES 110 from providing tax-effect accounting advice for their audit clients as it could jeopardise their independence. For others, a significant amount of initial and continuing training and resources is required to stay on top of this narrow discipline.
- Some of the more recent relevant complexities in this area include, but are not limited to:
- The introduction of the ‘base rate entity’ concept and the gradual shift of tax rates from 30% to 25%;
- Recent clarification from the IFRS committee on indefinite-lived intangibles being not non-depreciable asset (e.g. land) and its impact on deferred tax liabilities;
- Amendments that clarify the recognition principle of deferred tax assets for unrealised losses where fair value of an asset is less than its tax base; and
- IFRS committee guidance on the recently published IFRIC 23 – Uncertainty over Income Tax Treatments. Future reports may be expected to disclose or recognise amounts in dispute with tax authorities.
Tax accounting continues to be on ASIC’s radar as they recently made 8 tax accounting enquiries in their review of June 2017 financial reports from a sample of 50 listed entities. ASIC also continues to monitor that unlisted entities that are required to report are appropriately doing so with over 1,000 proprietary companies having received enquiry on their size in recent years. The AASB 112 challenge is not limited to listed entities alone.
MKT prepares AASB 112 compliant tax disclosures and works closely with auditors to ensure smooth tax disclosure reporting obligations for a wide range of ASX listed and non-listed companies across a range of industries. If you require assistance in preparing your tax disclosures, please contact Ben Reynolds, Linken Fragomeli or Gary Lim.
Do you earn Personal Services Income?
This is an important question for many contractors, because if the answer is “Yes”, the contractor can be limited in what deductions they claim and who pays the tax on their net income.
Personal Services Income (PSI) is defined to be income that is mainly a reward for your personal efforts or skills. Income can be PSI whether it is for doing work or for producing a result.
Some examples of income which are considered income from personal services, are:
- Salary or wages;
- Income of a professional person (eg doctor, lawyer, accountant) practising on their own without professional assistance;
- Income payable under a contract which is wholly or principally for the labour or services of a person;
- Income derived by a professional sports person or entertainer from the exercise of their professional skills; and
- Income derived by consultants (e.g. computer consultants or engineers).
The term “mainly” refers to “chiefly, principally or primarily”. The ATO considers the word “mainly” implies that more than half of the relevant amount of the ordinary or statutory income is a reward for the personal efforts or skills of an individual.
The following income is specifically excluded as PSI:
- Income derived mainly from the supply or sale of goods;
- Income derived mainly from the supply and use of income-producing assets;
- Income derived mainly from a business structure; and
- Income derived mainly for the granting of a right to use property
Where there are multiple obligations, that is the supply of goods and services, they must be considered as a whole to decide whether income is mainly a reward for the personal efforts and skills of an individual. A good example here is the sale and installation of plant or equipment. If more than half of the income is derived from the sale of the item, the whole income will not be PSI. However if an individual derives income from say, plumbing activities, but also from the sale of drain cleaners and plungers, the activities are not related and each source of income must be separately considered.
In undertaking that determination a comparison of the source of the income is required and whether the value of the efforts and skills of an individual exceeded the value of the other inputs, such as the efforts of other workers, the use of plant and equipment or of intellectual property or goodwill.
MKT Tax Training
MKT’s next Small Business Tax Case Study session will cover What is Personal Services Income and what to do when your client derives it?
In this session MKT Director, Sean Pearce will discuss the four types of income an individual or an entity can derive, focussing specifically on what is Personal Services Income (PSI) and what is not.
Where PSI is derived, Sean will also consider the application of the PSI Attribution Rules including recent ATO and Judicial authorities, together with the consequences when the PSI Attribution
Rules do not apply and how the Anti-Avoidance Rules of Part IVA act to stop individuals and entities alienating or splitting PSI.
When – Friday 5th October at 11.30am through to 1pm (lunch included).
Cost – $200 per attendee (inc. GST) – (PAN PD Vouchers Redeemable)
Where – MKT Offices, Level 11 London House, 216 St Georges Terrace, Perth.
*This session will qualify for 1.5 hours Structured CPD/CPE for CPA, ICAA and NIA members*
To register for this session, please contact Nicola Devonald from our office.
MKT Webinars – Download Now!
Our latest webinars ‘Restructures for SME Businesses, Preparing for the New Division 7A and Property Investments in SMSF’s are available to download now from our website.
Please visit our website to view all of our webinars available to download.
A reminder that PAN Member PD vouchers can be used to download our webinars. Please contact Nicola for the voucher codes or log in to the PAN Secure Zone on our website.
Premium Accountants Network – New Subscription Period Starting 1 October 2018.
Would you like priority access to Tax Advisors that spend every day dealing with Business Tax matters?
MKT Tax Advisors has been providing specialist tax support to Accountants, Lawyers and Financial Planners for over 20 years through our Accountant’s Network and are proud to offer our Premium subscription that elevates the services and value we provide to you and your clients.
The MKT PAN subscription is offered on a six monthly basis with the next period beginning on the 1st October 2018 – for more information contact Nicola Devonald on 08 9481 8448 or head to our website.