The Federal Commissioner of Taxation (Commissioner) has issued Taxation Ruling TR 2019/1 (Ruling) which addresses when a company carries on a business within the meaning of:
the small business entity (SBE) test under section 328-110 of the Income Tax Assessment Act 1997 (ITAA 97); and
the SBE test under section 23 of the Income Tax Rates Act 1986 as it applied to the corporate tax rate in the 2015–16 and 2016–17 income years.
By definition, an entity must, in addition to satisfying other criteria, carry on a business in order to constitute an SBE. As with many other tests in the tax legislation, whether a business is being carried on is a question of fact and degree and each case must be considered on its own merits.
While there is a myriad of factors to consider when ascertaining if a business is being carried on, the Commissioner, in the Ruling, has appeared to adopt the general view that has been stated by the Courts. Central to this view is that companies exist to make profit, and by extension, carry on a business in the general sense.
That being said, key indicators of carrying on a business also noted in the Ruling include:
the intention to carry on a business, whether or not expressed;
the nature of their activities;
whether activities are repeated and regular or organised in a business-like manner;
the size and scale of activities; and
whether the activity is better described as a hobby or recreation.
Some important points arising from the Ruling include:
there is a presumption that companies are created with the purpose of undertaking commercial ventures and are therefore likely to be carrying on a business (unlike an individual or trust);
a corporate beneficiary of a trust that reinvests the income distributed to it, or leaves the income uncalled for (an unpaid present entitlement), will likely be carrying a business.; and
companies with the sole purpose of holding and maintaining an asset for personal use or enjoyment are unlikely to be carrying on a business.
It must be emphasised that the Ruling is specific to companies rather than individuals and trusts. While the principles in the Ruling can therefore be instructive, they should not be strictly relied upon by non-corporate taxpayers or by taxpayers generally in relation to similar but distinct issues in the tax law, such as the test for income tax deductibility.
Corporate taxpayers should have significant regard to the Ruling because qualifying as an SBE offers significant advantages. This may include:
being eligible for the small business restructure rollover relief which offers significant business reorganisation flexibility;
access to simpler depreciation and trading stock rules;
eligibility to account for GST on a cash basis;
potentially accessing the small business capital gains tax concessions, noting that annual turnover must be below $2 million, not $10 million; and
generally being subject to only a 2-year amendment period.
If you require advice as to how the Ruling may affect you, please contact one of our specialists: