The ATO has issued Draft Ruling TR 2017/D7 to give guidance on whether a company is carrying on a business for the purpose of s 23AA of the Income Tax Rates Act 1986.
Section 23AA defines a "base rate entity" as an entity that carries on a business and has an aggregated turnover below the relevant threshold ($25 million for 2017–2018). A company that satisfies this definition is entitled to the reduced corporate tax rate (27.5% for 2017–2018).
The draft ruling addresses whether a company incorporated under the Corporations Act 2001 (other than a company limited by guarantee) carries on a business in a general sense. It emphasises that it is not possible to definitively state whether a company is carrying on a business for s 23AA purposes. As this is a question of fact, the ATO says the answer ultimately turns on an overall impression of the company's activities, having regard to the indicators of carrying on a business.
However, the ATO is prepared to state that limited companies and no-liability companies are likely to be carrying on a business if they:
- are established and maintained to make a profit for their shareholders; and
- invest their assets in gainful activities that have both a purpose and prospect of profit.
Importantly, the draft says that a limited or no-liability company can be carrying on a business even if its activities are relatively limited and primarily consist of passively receiving rent or returns on its investments and distributing them to its shareholders.
The draft provides the following examples of companies that the ATO accepts as carrying on a business:
- a property investment company that lets out and manages a commercial property;
- a share investment company;
- a family company with income consisting only of an unpaid trust entitlement, which it reinvests – the ATO says if the company does not reinvest the unpaid present entitlement (UPE) or receives its entitlement in cash, it will not be carrying on a business;
- a company that leases multiple boats to unrelated parties; and
- a holding company that only holds shares in a subsidiary, where it invests the shares and also manages the company group.
On the other hand, the following example companies are not considered to be carrying on a business:
- a dormant company with retained profits, on which it derives small amounts of interest; and
- a company engaged solely in the preliminary activity of investigating the viability of carrying on a particular business.