17 Sep ATO confusion on what it is meant by ‘carrying on a business’
In the 2016–17 Budget, the Government announced that it intended to progressively reduce the corporate tax rate from 30 per cent to 25 per cent. These changes to the corporate tax rate for small business entities have resulted in the necessity to re-consider whether your company is in fact carrying on a business. The Australian Taxation Office (ATO) interpretation of whether a company is carrying on a business or a not came into the limelight recently, with confusion over whether the corporate tax rate cuts will apply to passive investment companies, as generally in the past the receipt of passive investment income has not been regarded as enough for an individual taxpayer to be able to demonstrate that they are carrying on a business.
In regards to this issue, the ATO has stated on its website that is not possible to definitively state whether a particular company is carrying on a business, rather it is always a question of fact. This is based on the overall impression of the activities of a company and the relevant indication of whether a business is being carried on. The ATO went on to state that where a company is established and maintained to make profit for its shareholders and invests its assets in gainful activities that have a prospect of profit, then it is likely to be carrying on business. This is so even if the company’s activities are relatively passive and its activities consist of receiving rents or returns on its investments and distributing them to shareholders. Consequently it is likely that the reduced corporate tax rate will apply to a much broader range of private companies than had been expected.
While most companies will carry on a business in a general sense, this does not mean that every gain made by a company will be ordinary income. It is still necessary to determine the scope and nature of that business, in order to determine whether a gain will be an ordinary incident of that business and therefore assessable as ordinary income rather than a capital gain.
The ATO is currently consulting through the Tax Practitioner Stewardship Group on this issue and is expecting to provide guidance on this matter in the future. The form in which this guidance will be provided has not yet been determined.