Edited version of your written advice

Authorisation Number: 1013099172056

Date of advice: 28 September 2016

Ruling

Subject: Small business concession

Question 1

Is Company A a small business entity?

Answer

No.

Question 2

Is the income of Company A taxed at 28.5% for the year ended 30 June 20YY?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The gross income of Company A is under $2 million.

Company A does not conduct any business operations in its own right.

The assets of Company A include a unit holding in Trust A.

The income of Company A includes a distribution from Trust A and Trust B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-10

Income Tax Assessment Act 1997 Section 328-110

Reasons for decision

Section 328-110 outlines the meaning of small business entity. You are a small business entity for an income year if;

a) You carry on a business in the current year; and

b) One or both of the following applies

i) You carried on a business in the income year before the current year and your aggregated turnover for the previous year was less than $2 million;

ii) Your aggregated turnover for the current year is likely to be less than $2 million.

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the facts.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. The factors considered important are:

• whether the activity has a significant commercial purpose or character

• whether the taxpayer has more than just an intention to engage in business

• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

• whether there is regularity and repetition of the activity

• whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

• whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

• the size, scale and permanency of the activity, and

• whether the activity is better described as a hobby, a form of recreation, or sporting activity.

The small business company tax rate has been reduced from 30% to 28.5% for income years commencing on, or after, 1 July 2015. This lower rate also applies to small businesses that are corporate unit trusts and public trading trusts.

The corporate tax rate will remain at 30% for all other companies that are not small business entities. A company that receives a distribution from a trust that carries on a business will not be eligible for the reduced rate. Only an entity that carries on a business and is a small business entity will be eligible for the small business concession. If a company carries on a business and is a small business entity, all the income of the company will be taxed at the discount rate.

Application to your circumstances

The distributions that the company received does not represent any kind of business activity; the distributions are passive income. We consider that you are not carrying on a business for tax purposes and therefore you will not be eligible for a reduced tax rate.