We have previously written (see here and here) that the Tax Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 (the Bill) that proposes to deny the lower 27.5% corporate tax rate to corporate tax entities with less than $25 million of turnover that derive predominantly (80% or more) passive income (‘base rate entity passive income’) had not been debated by the Parliament since 12 February 2018.

Amongst the chaos in the Federal Parliament yesterday, the Senate passed the Bill (without amendment) and if assented to applies from 1 July 2017.

Taxpayers and their advisors will breathe a sigh of relief as the delayed passage of the retrospective legislation created considerable uncertainty.

If assented to (which is expected), the changes from 1 July 2017 are that:

the 80% ‘base rate entity’ passive income test will replace the current carrying on business test (in addition to the turnover test) to access the 27.5% tax rate;
a company’s franking rate will be determined by its previous year’s turnover but also the proportion of the previous year’s base rate entity passive income; and
the ATO’s guidance will need to be updated or withdrawn (including Taxation Ruling TR 2017/D7 on carrying on business for purposes of the former test).

On this last point, the ATO released LCR 2018/D7 ‘Base rate entities and base rate entity passive income’ on its view on the application of the new test. When/if finalised LCR 2018/D7 will apply from 1 July 2017.

Neil Brydges
Special Counsel | Accredited specialist in Tax Law
Sladen Legal
M +61 407 821 157 | T +61 3 9611 0176
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia
E: nbrydges@sladen.com.au

Sam Campbell
Associate | Business Law
Sladen Legal
M +61 423 515 454 | T +61 3 9611 0135
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia
E: scampbell@sladen.com.au

Kelvin Yuen
Lawyer
Sladen Legal
T +61 3 9611 0177
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia
E: kyuen@sladen.com.au