March 8, 2018
The ATO has issued a draft taxation ruling to explain the factors it will consider when deciding whether a company (incorporated under the Corporations Act 2001) is “carrying on a business”. This is one of the tests companies and small businesses must pass to be eligible for the lower corporate tax rate.
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 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.
Please do not hesitate to contact our office if you would like assistance in determining whether the ATO’s draft ruling has any implications for a company you control.