Private ruling: Company tax rates
Date of advice: 4 May 2018
Published: July 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the company a small business entity and therefore entitled to the company tax rate of 27.5% under subsection 23(2) of the Income Tax Rates Act 1986 ? | A1: Yes. The Commissioner is satisfied that the company is carrying on a business. After considering the overall impression of the company’s activities it is clear that the company was established to make a profit for the shareholders. In addition to this the company has invested its assets in gainful activity that has both a purpose of prospect of profit. In particular the company invests the returns it receives from the Family Trust in term deposits that yield a profit on a yearly basis. The Commissioner would like to note that the income that the company receives from the discretionary trust does not indicate that the company is carrying on a business; this is because the right to future income of the trust is at the discretion of the trustee. While the company has previously received a distribution from the Family Trust there is no guarantee that the company will continue to receive distributions. However, even though this activity does not amount to a carrying on of a business, the activity of investing the available cash in the company in term deposits does. Therefore the company is entitled to the 27.5% company tax rate under subsection 23(2) of the Income Tax Rates Act 1986 .

Relevant facts and circumstances: The company was established in 19XX. The company was originally established to run X business, this activity has now ceased. The company then purchased commercial properties for investment purposes which it has now sold. The company is also the discretionary object of a Family Trust. The family Trust owns units in Unit trusts. The trustee of the Family Trust exercises its discretion annually and makes the company presently entitled to trust income. The Family Trust pays cash to the company in satisfaction of this present entitlement. From these receipts received, the taxpayer declares and pays dividends to its shareholders and also retains an amount of money which it is reinvested in interest bearing term deposits. The company makes a profit from the interest it earns annually on these term deposits. The term deposits are actively renewed and interest rates are negotiated with the bank. The company has continued this pattern of activity for multiple income years. The director of the company keeps records of income and expenditure which form the basis of preparation of its annual special purposes financial statements and company tax returns. The director provides the shareholders with regular reports and updates. The aggregated turnover for the company is less than $XXX.

Relevant legislative provisions: Income Tax Rate Act 1986 section 23 | Income Tax Assessment Act 1997 section 328-110