The Australian Tax Office signals massive tax windfall for the wealthy

THE Australian Taxation Office has paved the way for family investment companies to claim back hundreds of millions of dollars in company tax.

Taxation Commissioner Chris Jordan. The ATO is looking to give a tax break to family companies. Picture Kym Smith

THE Australian Taxation Office may open the floodgates for family investment companies across the country to claim back hundreds of millions of dollars in company tax, after issuing a landmark ruling that signals a flood of future refunds.

The likely refunds would extend tax cuts implemented for active trading companies earning up to $25 million in income to passive family investment vehicles that are designed to warehouse, or retain, family wealth, reports The Australian.

In the past two years, the federal government has reduced the company tax rate for smaller companies by 2.5 per cent to its current level of 27.5 per cent. The ATO’s ruling could mean massive refunds and ongoing reductions for hundreds of thousands of passive family investment companies. For example, one warehousing $1m of taxable income per year could save $25,000 for each tax year.

BDO senior tax partner Tony Sloan told The Australian the tax change was “massive.” Picture: Supplied

BDO senior tax partner Tony Sloan told The Australian that the change is “massive.” “Everyone is talking about it. It affects a lot of our clients,” he said.

There could, however, be issues if family companies don’t plan their affairs properly. Mr Sloan saidthat mum-and-dad shareholders of low-tax companies could be hit if the companies chose to distribute fully franked dividends to them.

However, he said many of those types of companies and their shareholders would benefit from the new ruling, particularly wealthy families, as their companies tended to warehouse profits “over years and decades”, and were frequently used as a form of “family bank”.

When the tax cuts were announced a few years ago, it was made clear they would only apply to companies that carried on a business. However, the ATO has taken a much more generous stance than expected for passive family companies. Its draft ruling states 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.”

The ATO’s Chris Jordan (middle) with Australian business leaders David Gonski and Elmer Funke. Picture: Dylan Robinson

Sources told The Australian that the ATO had indicated it was working on more detailed guidance on the issue, which would be published “very soon”. “The ATO is aware there is a lot of interest in this topic,” the source said.

Mr Sloan said most family investment companies would already have filed a return for the 2016 year at the full 30 per cent company tax rate. He is advising these entities to consider seeking a refund for the 2016 financial year and to review the position for the 2017 financial year. “Even for my own family company, which has a range of passive investments, I filed my return in 2016 at the 30 per cent company tax rate,” Mr Sloan said. “Once the ATO issues its final guidance on this matter that clarifies that passive companies are indeed carrying on a business, I will be looking for a refund as well. I went to a meeting the other day with 10 people in the room, where this issue was discussed. Every person in the room had a family investment company.”

The tax cuts affected companies that earned up to $10m in income in 2016-17, rising to $25m this financial year.

This story was originally published in The Australian and is reprinted with permission.