Edited version of private advice

Authorisation Number: 1052210288478

Date of advice: 12 January 2024

Ruling

Subject: Base rate entity

Question

Whether the Company will be a base rate entity for the income years ending 30 June 20XX to 30 June 20XX under section 23AA of the Income Tax Rates Act 1986 (ITRA 1986)?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background and history

The Company is an Australian Private Company.

The Company purchased the property from three unrelated third parties.

The property is still on hand and has not been sold.

The Company has an office located on the property premises where all Company records are kept.

The property

The property is located on a corner block.

The property has multiple titles and leases.

The intention of the property is to derive rental income.

There is no property manager engaged for the property.

The Company directors engage real estate agents for advertising if and when applicable and where most appropriate (for example, when tenants move on).

The lease agreements are drawn up between the Company lawyer and its directors.

The lease terms are usually between XX to XX years, plus renewals.

Rental income is the only source of income for the Company.

Rent is collected by electronic funds transfer straight into the sole bank account of the Company.

Rental amounts are determined at commencement of the lease, via market rate and charged monthly. Rental amounts are changed if necessary if the market rate is drastically different to the lease.

There are currently no strategies in place to expand the rental property activities.

Management and control

The Company directors vet potential tenants.

The Company directors are involved in carrying out any repairs and maintenance of the property and spend time on these activities.

The Company has employed various other trades that attend to repairs and maintenance of the property and this occurs on a reasonably regular basis.

The point of contact for tenants are the directors of the Company.

The Company directors undertake regular property inspections and the length of inspection is variable.

There are various issues that arise with the property which require attention.

Assessable income and aggregated turnover

For the ruling period, the aggregated percentage of entities turnover sourced from rental income is XX%.

The aggregated turnover for the ruling period is $XXXX from a XX year total of $XXXX.

Relevant legislative provisions

Income Tax Rates Act 1986 section 23AA

Income Tax Rates Act 1986 section 23AB

Income Tax Rates Act 1986 subparagraph 23AB(1)(d)

Reasons for decision

Section 23 of the Income Tax Rates Act 1986 (ITRA 1986) provides the rates of tax payable by a company, other than a company in the capacity of a trustee with the applicable tax rate determined dependent on whether the company is a base rate entity as described in section 23AA of ITRA 1986.

For a company to qualify as a 'base rate entity', it must meet the following criteria under section 23AA of the ITRA 1986:

a)            no more than 80% of its assessable income for the year of income is base rate entity passive income (BREPI); and

b)            its aggregated turnover (within the meaning of ITAA 1997) for the year of income, worked out as at the end of that year, is less than $50 million.

Section 23AB of the ITRA 1986 provides the meaning of BREPI and paragraph 23AB(1)(d) of the ITRA 1986 states that BREPI is assessable income that is interest (or a payment in the nature of interest), royalties and rent.

Paragraph 8 of Law Companion Ruling 2019/5 Base rate entities and base rate passive income explains that:

•                     eligibility for the lower corporate tax rate depends on an entity's BREPI and aggregated turnover in an income year

•                     a corporate tax entity's tax rate may change if there are fluctuations in either their BREPI, as a percentage of their assessable income, or their aggregated turnover, and

•                     the Commissioner does not have a discretion to allow an entity to be a base rate entity in an income year, if its BREPI is more than 80% of its assessable income or its aggregated turnover exceeds the applicable threshold in that income year.

Rent is not a defined term for the purposes of BREPI and so takes its ordinary legal meaning. Paragraph 15 of LCR 2019/5 explains that rent is the consideration payable by a tenant to a landlord for the exclusive possession and use of land or premises.

In the circumstances here, the Company does not meet the criteria under paragraph 23AA(a) of the ITRA 1986 as its rental income is more than the 80% of its assessable income in each year being tested. Therefore, given the Commissioner has no discretion to treat a company as a base rate entity when the section 23AA of the ITRA 1986 criteria are not satisfied, the company is not a base rate entity and as such is ineligible for the lower company income tax rate under section 23 of the ITRA 1986.