Property investors locked out of small business low tax rate

The Australian 12:00am September 19, 2017

David Uren

Property and share investors will be denied access to the Turnbull government’s special low small business company tax rate under amendments being pushed through by Revenue Minister Kelly O’Dwyer.

Tax specialists say the changes, prohibiting firms that earn 80 per cent or more of their revenue from passive or investment income, will add to the complexity of the tax system and highlight the avoidance opportunities created by the new two-tier company tax rates.

Ms O’Dwyer said yesterday that the government’s decision to cut the tax rate for small companies was not intended to apply to passive investment companies.

“The Turnbull government is committed to lower taxes on business because we want to see them invest and grow,” she said. “These amendments will provide greater clarity about who qualifies for the lower company tax rate.”

Tax Institute senior tax counsel, Bob Deutsch said the new two-tiered company tax system raised issues about which rate should apply in what circumstances.

“There may be questions about whether it is appropriate, for example, for all rent to be classified as passive income for this purpose. At a broader level, the need for a policy decision of this type highlights the inevitable complexity arising from a two-tier corporate tax rate system,” Professor Deutsch said.

Director of the Australian ­National University’s Tax and Transfer Policy Institute, Miranda Stewart, said the draft legislation introduced a concept to tax law of “base rate passive entity income”.

“Previously only those who worked in technical areas would have had to deal with concepts like this, but now small businesses and their advisers will have to come to grips with it,” she said.

“We now have another boundary line between predominantly passive income and active business income.”

Companies that have a blend of investment and conventional business activities will have to take care how they structure them for tax purposes.

KPMG tax partner Grant Wardell Johnson said it had long been obvious as soon as the low small business tax rate was announced that there would be problems with whether a company with passive investment income was “carrying on a business”.

“The government found it hard to accept that in political terms,” he said. “I welcome the government’s move to establish a ‘bright line’ test.”