Is your passive investment company carrying on a business?
The ATO has issued a final tax ruling, TR 2019/1, which replaces its previous views expressed in TR 2017/D7. The ruling takes a broad view of the meaning of ‘carrying on a business’ which will extend to companies that hold mainly passive assets, such as shares or property, as long as its activities are carried out with a view to making a profit.
Criteria for carrying on a business
Although it is subjective whether a company is carrying on a business, some key criteria have been outlined in the ruling:
An intention to carry on a business;
The nature of the company’s activities and whether they have a purpose of profit;
The existence or absence of a profit-making purpose;
A purpose and prospect of making a profit;
Repetition and regularity of activity;
Organisation of activities in a systematic and business-like manner; and
Size and scale of the companies and capital employed.
Application only to companies
The ruling only applies to companies and does not apply to incorporated or unincorporated associations, partnerships, trusts or individuals. Companies have special treatment compared to other structures as there is generally a presumption that a company is formed, and activities are undertaken, with a view to making a profit, unless there are facts that clearly demonstrate otherwise. Unlike individuals, partnerships and trusts, it is less likely that a company will have been formed and its activities carried out for multiple purposes. Therefore, the absence of a personal, domestic or other purpose (such as asset protection) makes it more likely that a company’s activities will be seen to have a commercial, profit-making intention.
The ruling also states that a corporate beneficiary of a trust could be treated to be carrying on a business if the company invests the trust distributions, either by loaning the funds back to the trust or taking receipt of the distribution and acquiring external investments. If there are repeated trust distributions to the company over multiple years, it is likely that the company will become a more active participant in the trust’s affairs. This makes it more likely that it would be regarded as carrying on a business.
Examples of companies carrying on a business
In this new ruling, the ATO has provided some examples of companies that would be considered to be carrying on a business:
A company which has ceased its trading business in prior years but has retained profits and receives income from passive investments;
A recently incorporated company that invests in a passive investment while it engages in preliminary activities to determine the viability of the business;
A company that derives rent from its ownership of a commercial property under commercial terms to an external party;
A company that derives dividends from its share portfolio;
A company that leases boats to an unrelated party;
A holding company that holds shares in a trading company, where the holding company’s sole activities are to manage the company group;
A holding company that holds shares in a trading company, where the holding company makes an interest-free loan to the trading company or makes its plant and equipment available to the trading company for use in its business without any charge.
Tax concessions available to SBE companies
The consequence of this ruling is that the Small Business Entity (SBE) concessions will become available not only to active trading companies but also passive investment companies. The following concessions are available to these companies if their turnover is less than the $10 million threshold:
An immediate deduction for prepaid expenses applies where the period to which the expense relates is no more than 12 months.
An immediate deduction for entity start-up costs covers capital costs traditionally referred to as ‘black-hole’ expenses, including advisers’ fees and ASIC fees relating to incorporating a company or establishing the structure more generally.
SBEs are able to claim an instant write-off for any fixed assets, such as plant and equipment, costing less than $20,000 that were acquired between 12 May 2015 and 28 January 2019, for acquisitions costing less than $25,000 between 29 January 2019 and 7.30 pm on 2 April 2019, and for acquisitions costing less than $30,000 between that time and 30 June 2020, after which the write-off threshold is due to revert to $1,000. A medium business with a turnover above $10 million but less than $50 million can also access this concession from 2 April 2019.
Limitations
The reduced company tax rate of 27.5% for Base Rate Entities and the small business CGT concessions remain unavailable to passive investment companies as they only apply to active trading companies.
If you have questions on any of the above, or other matters relating to your tax or financial affairs, please do not hesitate to contact our office on (07) 5504 5700 to speak to one of our trusted advisors.
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