The Australian Taxation Office (ATO) has issued a draft Taxation Ruling clarifying when a company carries on a business for the purposes of accessing the lower corporate tax rate.

From 1 July 2017, a company is eligible for the lower corporate tax rate (27.5 per cent in 2017/18) if it is considered a base rate entity. A company will be a base rate entity if it carries on a business and has an aggregated turnover of less than $25 million (increasing to $50 million in 2018/19). A passive income test, limiting the amount of passive income a company can earn to be considered a base rate entity, is also proposed to be introduced.

In determining whether a company is carrying on a business, the draft ruling states that a number of factors should be considered, including:

  • the nature of the company’s activities, particularly whether they are intended to be profit making
  • the company’s intention to carry on a business
  • the degree of repetition and regularity of the company’s activities, including whether the activities are carried on in a business-like manner, and
  • the size and scale of the company’s operations

Broadly, the ATO considers that if a company is established and maintained to make a profit for shareholders and its assets are invested in activities intended to make a profit, it is likely that it will be carrying on a business in a general sense. The draft ruling states that a company is unlikely to be carrying on a business if it has no prospect of making a profit and its activities lack a commercial character.

Comments on the draft ruling are due by 1 December 2017.

Further information

Australian Taxation Office, Draft Taxation Ruling TR 2017/D7 Income tax: when does a company carry on a business within the meaning of section 23AA of the Income Tax Rates Act 1986 18 October 2017

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