Last week it was revealed in The Australian that a draft tax ruling issued by the Australian Taxation Office (ATO) in March 2017 could allow “passive” family investment companies to claim tax refunds and deductions, opening the door for wealthy families to claim back hundreds of millions of dollars in tax refunds and reductions. This draft ruling overturned the generally-accepted view that such family investment companies – which do not actively carry on a business – would not be eligible for the reduction in the company tax rate for small businesses from 30% to 27.5% over recent years.
The Australian followed-up with another report that Financial Services Minister, Kelly O’Dwyer, had advised the ATO that the Federal Government’s tax cuts for small businesses were not meant to apply to passive family investment companies.
Today, The AFR reports that the ATO’s updated advice on the application of small business tax cuts to passive family investment companies, which states that the 27.5% tax rate will apply only to companies whose activities are “relatively passive” (rather than “passive” previously), does little to clarify the situation and has created further confusion among tax experts:
A new statement on the ATO website says companies will be eligible for the lower 27.5 per cent rate afforded under the Enterprise Tax Plan even if their activities are “relatively passive”…
Tax Institute senior tax counsel Bob Deutsch said the ATO’s latest statement did nothing to clear up confusion about eligibility.
“The position with all this is, in my view, utterly confused and will lead to countless errors being made by tax practitioners,” he said.
“The bar appears to have been set relatively low in satisfying the requirement for carrying on a business in this context. Concrete examples would be required to give the community a better understanding of what is meant by ‘relatively passive’.”
Arnold Bloch Leibler tax practice chief Mark Leibler said it was obvious the tax cuts were only ever meant to apply to active trading businesses.
“I have never seen a standoff like this before between the Tax Office and Treasury and the responsible ministers,” he said.“I find this mind-boggling. What the government contemplated was people who are actually engaged in real, active business activities…not bucket companies sitting around and deriving passive income.”
When this issue initially broke last week, BDO senior tax partner, Tony Sloan, argued that the Government may need to amend the legislation to ensure that such investment vehicles cannot claim tax refunds and deductions:
“The ATO does not take dictation from politicians. There is a mountain of tax cases that support the ATO’s interpretation of the measures that ushered in the tax cuts”…
Mr Sloan says the legislation that introduced the tax cuts was “too broad” to exclude passive family investment companies.
The legislation states only that the tax cuts apply if a company “carries on a business” and meets a turnover threshold of $25 million for the current year…
“If the law doesn’t work, the government will have to fix it. That could mean having to change the tax measures as they stand through changes to the tax cut legislation.
Based on this latest update, Sloan has a point.
Labor had a field day last week attacking the Government on this issue. Let’s hope they support the Government in passing any legislation to close this loophole.
