When does a company carry on a business? This is an important question, primarily for the small business entity concessions which require the entity to be carrying on a business.
In Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? the Commissioner answers this question. But only for companies. But only for the small business entity rules and the lower company tax rate rules. How the word “business” means something different in other contexts is beyond me but this is what the Commissioner states.
He then states that the key indicia considered by the courts in determining whether the activities carried on by an entity amount to the carrying on of a business are:
- Whether the person intends to carry on a business;
- The nature of the activities, particularly whether they have a profit-making purpose;
- Whether the activities are repeated and regular and organised in a business-like manner, including the keeping of books, records and the use of a system;
- The size and scale of a company’s activities including the amount of capital employed in them; and
- Whether the activity is better described as a hobby, or recreation.
That is all well, but it is how he applies these criteria that is awesome for us.
“Where a … company is established and maintained to make a profit for its shareholders, and invests its assets in gainful activities that have both a purpose and prospect of profit, it will normally be carrying on a business in a general sense…”
Isn’t that almost every company? Don’t believe me? Look at what he says about our bucket companies…
“Most corporate beneficiaries of family discretionary trusts are formed and appointed beneficiaries of trusts, with the clear expectation of being made entitled to any trust income… They either reinvest the income in the trust, by way of a formal loan, by leaving the income uncalled for, or invest it in other ways that give rise to an entitlement to a return of profits. These companies are carrying on a business to profit in connection with the trust.”
Did you think a bucket company with a UPE is carrying on a business? Neither did I.
What about a company that just has retained profits earning interest?
“InactiveCo carried on a trading business that was wound up… InactiveCo has $400,000 of retained earnings which it holds in a bank account… [T]he company’s income has consisted solely of interest of $12,000 a year. InactiveCo has no intention of resuming its trading business… InactiveCo’s activities have both a purpose and prospect of profit. InactiveCo is carrying on a business.”
Not what I expected.
What about a share investment company with just listed shares. It can’t be carrying on a business, can it?
“ShareCo holds a portfolio of listed shares worth $400,000. The shares generate $20,000 in income a year… ShareCo carries on a business.”
So almost every company is carrying on a business and can be a small business entity. Amazing.
But just so you don’t get too excited, on the same day he released this Ruling the Commissioner released Taxation Determination TD 2021/2.
This asks “can a company that carries on a business in a general sense as described in Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? but whose only activity is renting out an investment property claim the capital gains tax small business concessions in relation to that investment property?”
In summary can all these companies start using the small business CGT concessions now they are small business entities? No. Why not? Because being a small business entity is just one condition. In this case the asset must also be an active asset and an asset that derived passive income, like rent, is excluded from being an active asset.
Will lots more companies be small business entities? Yes. Will it make a big difference? Maybe not, but feel free to tick the small business entity box on most company tax returns (of course where the aggregate turnover of the group is under $10 million).