Has Your Family Investment Company Paid Too Much Tax

Your Family Investment Company Could’ve Paid Too Much Tax! - 5 July 2017

Has Your Family Investment Company Paid Too Much Tax?

Buried in the footnotes of an ATO draft ruling that issued earlier this year was an acknowledgment that “generally, where a company is established or maintained to make profit or gain for its shareholders it is likely to carry on business. …

This is so even if the company only holds passive investments, and its activities consist of receiving rents or returns on its investments and distributing them to shareholders.”. It is understood the ATO will soon be issuing guidance on this issue.

Why, you may ask, is this relevant for family investment companies that just receive passive income such as rent, dividends, interest and trust distributions?

Because to be eligible for the reduced company tax rate of 28.5% in 2015-16 (turnover <$2M) and 27.5% in 2016-17 (turnover <$10M) a company must be a “small business entity” which means the company must carry on a business.

Most family investment companies receiving passive income will not have treated themselves as small business entities because they thought they were not carrying on a business and so will have paid tax at 30% instead of at the lower rates.

The ATO’s acknowledgment that a company carries on a business even though it receives passive income, means many family investment companies that carried on business only by receiving rent, dividends, interest or trust distributions will have paid too much tax.

Assuming a company income of $1,000,000 the tax overpaid in 2015-16 would be $15,000 and in 2016-17 it would be $25,000 unless appropriate action is taken.

Affected family investment companies would be entitled to a refund of the tax overpaid in 2015-16 plus interest of up to 2.28%.

For those companies that have already paid fully franked dividends to their shareholders at the higher tax rate, there would need to be a corresponding adjustment required to the imputation credit claimed by the shareholder.

Careful planning is required for the 2016-17 and future income years.

If you think you could be affected by this or due a refund for 2015-16, contact us for assistance.

5 July 2017

Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.

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