Private ruling: Am I in business for the purposes of eligibility for the lower corporate tax rate?
Date of advice: 28 June 2018
Published: September 2018
Ruling period: Year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Has the reimbursement in respect of the private use of the company’s vehicle by the Director been properly treated as fringe benefit employee contribution? | A1: Yes. | Q2: Is the company an eligible entity for the purpose of applying a lower corporate tax rate of 27.5% for the 2016-17 income year? | A2: No. | Q3: Will the same tax rate apply for the 2017-18 and future years in respect of the new “Bright Line’ test which operates as from the 2017-18 financial year? | A3: Unable to rule

Relevant facts and circumstances: The company operates a computer consultant activity. The income generated from this activity is personal services income and is attributed to the Director as personal services income via the PAYG system. The company incurs motor vehicle expenses in respect of the generation of this personal services income. The company is reimbursed in respect of the private use of the company’s vehicle by the Director. This reimbursement has been treated as ‘other’ income of the company and taxable to the company. The company does not have any other income or carry out any other activity.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 7 | Fringe Benefits Tax Assessment Act 1986 Section 136A | Income Tax Assessment Act 1997 Subdivision 328-C | Income Tax Rates Act 1986 Section 23AA

Reasons for decision: Detailed Reasoning - Fringe benefit employee contributions: As a general rule, a taxable fringe benefit arises if an employer's car is made available for the private use of an employee under section 7 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). In most cases, the fringe benefits tax (FBT) liability can be reduced if employees make payments towards the cost of providing a fringe benefit. The payment is commonly called an employee contribution. Any contribution by an employee for the use of the car, or in payment of car operating expenses, is deducted in calculating the final taxable value of the car fringe benefit. For every dollar that the employee contributes, the taxable value of the benefit is reduced by a dollar. If the contribution equals the taxable value, FBT will be reduced to nil. However, employee contributions may have GST implications for the employer. Employers will be required to account for GST amounting to 1/11 th of an employee's cash contribution. On the other hand non-cash contributions by employees, such as the payment by employees of fuel expenses in respect of an employer-provided car benefit, will not be subject to GST in the hands of the employer. | Detailed Reasoning - Example 1: GST payable on cash contribution: Katherine is provided with a car fringe benefit by her employer, Orbit Pty Ltd, which is registered for GST purposes. During the period 1 April 2017 to 31 March 2018 (2018 FBT year), Katherine makes a cash contribution of $4,400 directly to her employer towards the running costs of the car. ● Orbit will have to remit $400 (1/11th of $4,400) of that contribution in respect of GST. ● Orbit can deduct the full $4,400 of the contribution when calculating the taxable value of the car for FBT purposes. | Detailed Reasoning - Example 2: No GST payable on fuel or oil: Thomas is provided with a car fringe benefit by his employer, Blue Gum Developments, which is registered for GST purposes. Thomas makes a contribution towards the running costs of the car by paying for the petrol, oil and servicing. During the period 1 April 2017 to 31 March 2018 (2018 FBT year), the total of these costs amounted to $2,900. In these circumstances, Thomas's contribution is not considered to be a contribution for the supply of the car fringe benefit for GST purposes, but instead would have been a contribution for the supply of those items or services by a third party, namely the service station ( Taxation Ruling TR 2001/2). Therefore: ● Blue Gum will not account to the ATO for GST in respect of Thomas's purchases. ● Blue Gum can deduct the full $2,900 of the non-cash contribution when calculating the taxable value. ● If the cost of Thomas's car is $30,000 and the statutory fraction is 0.20, the taxable value is calculated as follows: $30,000 × 0.20 = $6,000 Less: employee contribution = $2,900 Taxable value = $3,100 The employer must include any employee contributions paid directly to them in their assessable income, including those contributions received by way of an offset against an amount payable to the employee. Employee contributions paid to a third party who is not an associate (for example, for fuel) are not assessable to the employer. The Company tax instructions 2017 explains that all payments that the company has received from recipients of fringe benefits are to be written at Question 6 Label I - Fringe benefit employee contributions. Employee contributions form part of the employer’s or associate’s assessable income if employees make payments for fringe benefits that they have received. You have correctly reported these employee contributions at Question 6 – Income - Label I - Fringe benefit employee contributions. | Detailed Reasoning - Eligible entities for the purpose of applying a lower corporate tax rate of 27.5% for the 2016-17 income year: For the 2016-17 income year, the lower corporate tax rate of 27.5% effectively applied to corporate tax entities that are small business entities. The concept of a ‘small business entity’ is explained in Subdivision 328-C of the Income Tax Assessment Act 1997 (ITAA 1997). An entity is a ‘small business entity’ if it: (1) carries on a business; and (2) satisfies the $10 million aggregated turnover test. The term ‘business’ has been defined to include any profession, trade, employment, vocation or calling, but it does not include occupation as an employee. In Federal Commissioner of Taxation v. Murry, Gaudron, McHugh, Gummow and Hayne JJ observed: (1) ...A business is not a thing or things. It is a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions. Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides a guide to the indicators that are relevant to whether or not a person is carrying on a business of primary production however they are applicable to any business: ● whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators (paragraphs 28 to 38); ● whether the taxpayer has more than just an intention to engage in business (paragraphs 39 to 46); ● whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity (paragraphs 47 to 54); ● whether there is repetition and regularity of the activity (paragraphs 55 to 62); ● whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business (paragraphs 63 to 67); ● whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit (paragraphs 68 to 76); ● the size, scale and permanency of the activity (see paragraphs 77 to 85); and ● whether the activity is better described as a hobby, a form of recreation or a sporting activity (paragraphs 86 to 93). Draft Taxation Ruling 2017/D7 Income tax: when does a company carry on a business within the meaning of section 23AA of the Income Tax Rates Act 1986? (TR 2017/D7) sets out the Commissioner’s preliminary, but considered views on when a company carries on a business. TR 2017/D7 concludes that, whether a company is carrying on a business within the meaning of section 23AA of the Rates Act ultimately depends on an overall impression of the company’s activities. Where a company is established and maintained to make a profit for its shareholders, and invests its assets in gainful activities that have both a purpose and prospect of profit, it is likely to be carrying on a business in a general sense and therefore to be carrying on a business within the meaning of section 23AA of the Rates Act. In these circumstances, it is likely the other indications of carrying on a business will support this conclusion. This is so even if the company’s activities are relatively limited, and its activities primarily consist of passively receiving rent or returns on its investments and distributing them to its shareholders. Although the company is carrying out an activity to derive a profit, this profit must be attributed to the director as the PSI rules apply. The operation of the PSI rules prevents the company from making a profit for its shareholders in any income year in relation to this activity as it must be paid to the individual that provided the services. The Commissioner considers that this activity does not amount to carrying on of a business. The only other income of the company is derived from the Director reimbursing the fringe benefit incurred by his personal use of the company car. This activity does not have the characteristics of carrying on a business while it may be repeated and regular there is no intention to derive a profit and no commercial purpose. In this case the activities carried out by the company have no commercial purpose or character and does not produce profits for its shareholders, nor does it have a strong intention to make a profit or gain from investing its assets. While the company may satisfy some of the abovementioned business indicators, overall, it does not have the necessary characteristics of a business for taxation purposes. Therefore the company is not an eligible entity for the purpose of applying a lower corporate tax rate of 27.5% for the 2016-17 income year. | Detailed Reasoning - Future year company tax rates: Whether or not a business is being carried on is determined on a year by year basis depending on the facts of each case. If in the future, your activities increase and or your situation changes, you can seek further advice at that time. For the 2017–18 income year, companies that are base rate entities must apply the lower 27.5% company tax rate. Currently, a base rate entity is a corporate tax entity that: ● is carrying on a business; and ● has an aggregated turnover less than the aggregated turnover threshold (which is $25 million for the 2017–18 income year) and ● has an aggregated turnover of less than $50 million for the 2018-19 income year As explained above you do not qualify for the base rate under the current law. There is currently a proposal to change the law, whether and how this changes is a matter for Parliament, and the Commissioner is unable to comment further.