When does a company carry on a business? ATO releases guidance

The ATO has released draft Taxation Ruling TR 2017/D7 Income tax: when does a company carry on a business within the meaning of section 23AA of the Income Tax Rates Act 1986? for consultation.

This draft Ruling provides guidance on when a company carries on a business within the meaning of section 23AA of the Rates Act.

A company will be a ‘base rate entity’ under section 23AA if it carries on a business and meets the aggregated turnover requirement. For the purposes of section 23AA, ‘business’ is defined in the income tax law to include ‘any profession, trade, employment, vocation or calling’, but excludes ‘occupation as an employee’.

The draft Ruling confirms that it is not possible to definitively state whether a company is carrying on a business. It does however confirm that ‘Limited’ and ‘No Liability’ companies are likely to be carrying on a business where they are established and maintained to make a profit for their shareholders, and invest their assets in gainful activities which have both a purpose and prospect of profit.

The draft Ruling addresses whether a company carries on a business in a general way. It does not address what the scope or nature of a company’s business is. This is a separate question that needs to be answered in order to work out the taxation consequences of the transactions a company undertakes, such as whether a gain made is ordinary income or a capital gain, or whether an outgoing or loss is capital in nature.

A variety of examples are included in the draft Ruling to assist a taxpayer to understand when a company may be ‘carrying on a business’.