Final guidance on operation of new base rate entity test

Law Companion Ruling LCR 2019/5 deals with the passive income threshold and other issues within the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act 2018 that limits access to the lower corporate tax rate. From the 2017-18 income year, a corporate tax entity must be a “base rate entity” to be taxed at the lower rate.

The legislation also makes changes to how a corporate tax entity calculates the amount of a franking credit it may attach to a frankable distribution.

The ruling provides advice on:

  • the general scheme of the new law
  • what amounts of assessable income are “base rate entity passive income” (BREPI)
  • the meaning of rent, interest and when a share of net income of a trust or partnership is referable to an amount of BREPI, and
  • how to calculate a corporate tax entity’s corporate tax rate for imputation purposes and work out the maximum amount of the franking credit it may attach to frankable distributions.

Under the new law, a corporate tax entity will be taxed at the lower corporate tax rate if it is a base rate entity. A corporate entity will be a base rate entity if:

  • no more than 80% of its assessable income is “base rate entity passive income” (BREPI), and
  • its aggregated turnover is less than the relevant threshold ($25 million in the 2017-18 income year; $50 million from the 2018-19 income year).

Eligibility for the lower corporate tax rate depends on an entity’s BREPI and aggregated turnover in an income year. A corporate tax entity’s tax rate may change if there are fluctuations in either their BREPI, as a percentage of their assessable income, or their aggregated turnover.

The Commissioner does not have a discretion to allow an entity to be a base rate entity in an income year, if its BREPI is more than 80% of its assessable income or its aggregated turnover exceeds the applicable threshold in that income year.

Unlike the aggregated turnover test, a corporate tax entity does not include the BREPI or assessable income of any connected entity or affiliate when determining whether it meets the 80% BREPI test.

In other words, it is only the BREPI and assessable income of the corporate tax entity that is relevant when determining whether 80% or more of its assessable income is BREPI. The BREPI and assessable income of any connected entity or affiliate is not relevant for this purpose.

Note that the ruling does not provide guidance on terms and concepts where there is existing ATO guidance on their meaning and the context of the law does not suggest a different meaning.

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