There is still current uncertainty as to when to apply the lower company tax rate of 27.5% for company tax payments and dividends. This is because key legislation (which is intended to clarify when active companies can access the lower rate) has not yet passed through Parliament. The ATO’s revised guidance acknowledges this issue and aims to address the current uncertainty.
Proposed ATO approach to tax rate change
The draft guidance (PCG 2018/D5) indicates that, generally, the ATO ‘will not allocate compliance resources specifically to conduct reviews of whether corporate tax rate entities have applied the correct corporate tax rate or franking rate in the 2015-16,2016-17 and 2017-18 income years’.
However, this approach will not apply where a) the ATO becomes aware that the assessment of whether a business was being carried on was plainly unreasonable, b) artificial or contrived arrangement were entered into to affect the characterisation of the company’s activities or conceal connected entities or c) a scheme was entered into the efficacy of which depended wholly or partly on whether the company was carrying on business.
Correcting franking errors
Ordinarily, a company would need to obtain the Commissioner’s approval to amend incorrect distribution statements. The draft guidance states a company may, for franked distributions made during the 2017 and 2018 income years, provide corrected franking information to members without seeking prior approval from the Commissioner. Provided the members are provided with a written notice showing the correct amount of the franking credit, the Commissioner will not impose penalties on the corporate tax entity.
Anticipating the further changes before parliament
The draft guidance states that, until the Bill that is currently before Parliament is passed, the relevant test for the reduced tax rate is the existing test (i.e. whether the company carries on a business). We are hopeful that the Bill will be passed during this Parliamentary sitting which started on 13 August. We will provide an update on this issue.
This is consistent with the ATO’s general administrative practice with respect to unenacted legislative changes which states:
“We won't advise taxpayers to self-assess by anticipating the announced change will become law, but if taxpayers choose to do so, we won't apply our resources to checking whether these self-assessments are correct (in accordance with the existing law).”
If the change is not enacted, a taxpayer that anticipated the change would be required to lodge a revised tax return. If the revision results in an increased liability, the ATO’s administrative practice is not to impose shortfall penalties and to remit interest to the base rate.
What should taxpayers do?
Unfortunately, many taxpayers are currently in a position where it is unclear which rules will apply. The new rules (before Parliament) contain a trust look-through rule, which means “business” income distributed to a corporate beneficiary can be treated as business income in their hands (and thus could result in the lower tax rate of 27.5%). This rule does not exist in the current rules, which means that the corporate beneficiary may be subject to a 30% tax rate. Given the ATO practical compliance guideline, we believe that taxpayers should (at the very least) consider waiting until the current sitting of Parliament (which goes from the 13 August to 20 September) has been completed before contemplating any course of action.