Practical Compliance Guideline
Enterprise Tax Plan: small business company tax rate change: compliance and administrative approaches for the 2015-16, 2016-17 and 2017-18 income years
|Table of Contents||Paragraph|
|What this Guideline is about|
|Date of effect|
|Compliance approach - determination of tax rate|
|Administrative approach - incorrect franking|
|Written notification informing members|
|Amended distribution statement|
Relying on this Guideline
This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach.
What this Guideline is about
1. This Guideline sets out the ATO's compliance and administrative approaches for corporate tax entities that have faced practical difficulties in determining their corporate tax rate and corporate tax rate for imputation purposes in the 2015-16, 2016-17 and 2017-18 income years.
2. The Commissioner acknowledges that uncertainty may have arisen as a result of changes to the tax laws that set out eligibility for the reduced corporate tax rate and the subsequent release of 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?
3. Tax Laws Amendment (Small Business Measures No. 1) Act 2015 amended the Income Tax Rates Act 1986 (ITRA 1986) to reduce the corporate tax rate to 28.5% for the 2015-16 income year for small business entities that were carrying on a business and had an aggregated turnover of less than $2 million.
4. Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 amended the ITRA 1986 to reduce the corporate tax rate to 27.5% for the 2016-17 income year for small business entities that were carrying on a business and had an aggregated turnover of less than $10 million.
6. On 18 October 2017, the Government introduced the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017. The Bill was passed on 23 August 2018 and received Royal Assent on 31 August 2018. The Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act 2018 removed the 'carrying on a business' requirement. Under the new law, a corporate tax entity will be eligible for the reduced rate from the 2017-18 income year, if:
- no more than 80% of its assessable income is base rate entity passive income, and
- its aggregated turnover is less than $25 million.
7. Given the timing of the passage of these Acts and the timing of the release of TR 2017/D7, some corporate tax entities may have made decisions about their eligibility for the reduced corporate tax rate without knowledge, or in anticipation, of the operation of the law under these Acts and the ATO view of what constitutes 'carrying on a business'. This may have led to some corporate tax entities lodging tax returns for the 2015-16 and 2016-17 years without certainty of the correct position. It may also have led to some corporate tax entities issuing distribution statements to members based on a franking rate that is incorrect.
- A facilitative compliance approach will apply to the 'carrying on a business' test in relation to eligibility for the lower rate in the 2015-16 and 2016-17 income years.
- A practical administrative approach will apply that allows corporate tax entities to choose a simplified method to inform members of the correct franking credit to which they are entitled.
Date of effect
9. This Guideline has effect from the first day of a corporate tax entity's 2015-16, 2016-17 or 2017-18 income year, depending on the entity's circumstances as outlined in paragraphs 10 to 21 of this Guideline.
Compliance approach - determination of tax rate
10. Under self-assessment, the Commissioner expects taxpayers to fulfil their obligations under the tax laws and assumes that the information provided by taxpayers in their tax returns is complete and accurate. As is always the case, the Commissioner may undertake review activity to ensure compliance, particularly where there is reason to believe a taxpayer's self-assessment, or the information provided, is incorrect.
11. Given the uncertainty around the 'carrying on a business' test prior to the release of TR 2017/D7, the Commissioner will adopt a facilitative approach to compliance in relation to the application of this test. This means that the Commissioner will not allocate compliance resources specifically to conduct reviews of whether corporate tax entities have applied the correct rate of tax or franked at the correct rate in the 2015-16 and 2016-17 income years. Under this approach, the Commissioner will not allocate resources to review the affairs of members in so far as it relates to the franking of distributions in these circumstances. However, this approach will not apply where:
- the Commissioner becomes aware that a corporate tax entity's assessment of whether they were carrying on a business in the 2015-16 or 2016-17 income years was plainly unreasonable, or
- the corporate tax entity has entered into
- any artificial or contrived arrangement affecting the characterisation of the company as carrying on a business or not
- a tax avoidance scheme whose outcome depends, in whole or part, on the characterisation of the company as carrying on a business or not, or
- arrangements designed to conceal ultimate beneficial or economic ownership of any connected or affiliated entities.
12. In addition, the approach will not apply where a corporate tax entity has attracted ATO compliance activity for reasons unrelated to whether the correct corporate tax rate has been applied by the corporate tax entity.
Administrative approach - incorrect franking
Written notification informing members
13. The maximum franking credit entitlement for a member in receipt of a franked distribution is determined by applying the formula in section 202-60 of the Income Tax Assessment Act 1997 (ITAA 1997). Under this section, the corporate tax rate for imputation purposes is used to calculate the maximum franking credit for a distribution.
14. An entity that makes a frankable distribution must give the recipient a distribution statement that includes the amount of the franking credit on the distribution. Ordinarily, where a corporate tax entity has issued an incorrect distribution statement, it would need to apply to the Commissioner for permission to amend and reissue the distribution statement.
- the amendments made by the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act 2018, or
- the passage of the amending Acts or the release of TR 2017/D7 after the distribution being made (see paragraphs 3 to 6 of this Guideline).
16. In these circumstances the corporate tax entity may inform its members of the correct franking credit to which they are entitled under the revised corporate tax rate in writing without reissuing the distribution statement.
18. The Commissioner will not impose penalties on the corporate tax entity for giving a member an incorrect distribution statement provided it gives written notice to each of its members clearly showing the correct amount of the franking credit. The notice should be provided in the same way as the distribution statement was provided (which may be electronically by email).
20. The notice should indicate that the distribution statement previously provided was incorrect and should contain the following details, such that the recipient has enough information to meet their tax obligations for the distribution:
- name of the entity making the distribution
- date on which the distribution was made
- amount of the distribution
- revised amount of franking credit allocated to the distribution, rounded to the nearest cent
- franking percentage for the distribution, worked out to two decimal places
- amount of any withholding tax deducted from the distribution, and
- name of the member.
Amended distribution statement
23. If the Commissioner grants permission, the corporate tax entity would then be able to provide the member with a new distribution statement and no penalty would be imposed for the initial incorrect statement.
24. ABC Co pays a fully franked distribution to a member of $100. The distribution was made on 31 December 2016 before the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 became law. Applying the 30% tax rate that applied at that time to ABC Co, the company calculated the franking credit to be allocated to the distribution to be:
[$100 * 0.30] / [1 - 0.30] = $42.86
26. Subsequently the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 was passed which reduced the corporate tax rate for small businesses with an aggregated turnover of less than $10 million to 27.5% for their 2016-17 income year. ABC Co meets the criteria for the lower corporate tax rate and maximum franking credit of 27.5% for distributions in the 2016-17 income year. The result is the initial franking credits allocated to the distribution exceed the maximum franking credit for the distribution and the distribution statement is incorrect.
27. Instead of seeking an exercise of the Commissioner's discretion to allow an amended distribution statement, ABC Co sends a letter to each of its members containing the details set out in paragraph 20 of this Guideline, and explaining that the distribution statement was incorrect.
28. When members lodge or amend their tax return, they will be able to use the information in this letter to determine the maximum franking credit on the distribution based on the 27.5% tax rate. Applying section 202-65 of the ITAA 1997 to these facts, this would be calculated as:
[$100 * 0.275] / [1 - 0.275] = $39.93
Commissioner of Taxation
6 December 2018
You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
See Draft Law Companion Ruling LCR 2018/D7 Base rate entities and base rate entity passive income for more information on the application of the new law.
Subsection 202-75(1) of the ITAA 1997.
Section 202-85 of the ITAA 1997.
Tax Laws Amendment (Small Business Measures No. 1) Act 2015 and the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017.
ITAA 1997 202-60
ITAA 1997 202-65
ITAA 1997 202-75(1)
ITAA 1997 202-85
Income Tax Rates Act 1986
Tax Laws Amendment (Small Business Measures No. 1) Act 2015
Treasury Laws Amendment (Enterprise Tax Plan) Act 2017
Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act 2018
Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017