ATO opens up tax concessions to investment companies

The ATO has confirmed that the scope of carrying on a business, for certain purposes, will extend to a company that holds primarily passive assets, including for investment purposes.

Under the ruling TR 2019/1 – issued as final in April this year – the scope of carrying on a business will now extend to companies that hold assets such as property, shares or other financial investments, as long as their activities are carried out with a view to making a profit, which can include simply holding the assets to derive an income stream and for making future capital gains.

The position the ATO has taken opens investment companies up to a wider range of tax concessions than previously thought available. The tax ruling covers two specific situations:

  1. Applying the lower company tax rate of 27.5% to a “small business entity” (SBE) for the 2016 and 2017 tax years, which affected both the tax paid by the company and the rate at which dividends paid were to be franked; and
  2. Determining whether a company would meet the definition of SBE under Division 328 of the tax legislation, which is relevant to claiming a range of small business tax concessions, not only in the 2016 and 2017 years, but also in subsequent years.

There are currently four other main tax concessions available to small businesses more broadly and, as a result of this tax ruling, should now be available not only to active trading businesses, but also to passive investment companies.

These concessions cover immediate deductions for prepaid expenses and entity startup costs and instant asset write-offs for SBEs with turnover not exceeding $10 million and medium businesses with turnover between $10 million – $50 million. The latter was only announced as part of the 2019 Federal Budget and while legislated, will only be available up until 30 June 2020.