Get­ting ac­tive on pas­sive in­come

But still un­cer­tain­ties

Finweek English Edition - - Creating Wealth - SHAUN HAR­RIS

CEN­TRAL TO THE pro­posed change from secondary tax on com­pa­nies (STC) to a share­holder tax on div­i­dends is the con­cept of “pas­sive hold­ing com­pa­nies”. Ex­actly what those are has been tax­ing the best le­gal minds ( Fin­week 28 Au­gust) since first in­tro­duced in this year’s Bud­get speech. It’s like a jig­saw puz­zle: pieces of clar­ity are iden­ti­fied and fit­ted into place. One day we should have the whole pic­ture.

Tim Des­mond, di­rec­tor of the tax and com­mer­cial de­part­ments at Gar­licke & Bous­field, might be able to add a few pieces. He says pas­sive hold­ing com­pa­nies are a pro­posed so­lu­tion to the ar­bi­trage op­por­tu­nity en­joyed by in­di­vid­u­als who choose to earn pas­sive in­come in a com­pany rather than their own hands.

“The 28% com­pany tax rate (as op­posed to the 40% max­i­mum mar­ginal in­come tax rate) for in­di­vid­u­als has been iden­ti­fied as of­fer­ing an ar­bi­trage op­por­tu­nity. The con­cept of pas­sive hold­ing com­pa­nies is in­tended to elim­i­nate the ar­bi­trage op­por­tu­nity by levy­ing a charge on cer­tain pas­sive in­come. The charge will be 40% (in­stead of 28%) on pas­sive or­di­nary rev­enue and 10% on div­i­dends. Debt, eq­uity, de­riv­a­tives and an­nu­ities will fall within the pas­sive hold­ing com­pa­nies regime.”

Des­mond says the charge will be off­set against fu­ture div­i­dends de­clared by the pas­sive hold­ing com­pany and in­come that’s been sub­ject to the ad­di­tional charges will be deemed to be dis­trib­uted first. But what ex­actly are those com­pa­nies?

Des­mond says a “com­pany” will con­sti­tute a pas­sive hold­ing com­pany in one of two

It’s like a jig­saw puz­zle: pieces of clar­ity are iden­ti­fied and fit­ted

into place.

sets of cir­cum­stances. “The first is where a com­pany is formed or availed of for the sole or main pur­pose of de­fer­ring, re­duc­ing or oth­er­wise avoid­ing in­come tax or div­i­dend tax, by ac­cu­mu­lat­ing or­di­nary rev­enue or

div­i­dends in­stead of hav­ing those amounts ac­cu­mu­lated di­rectly by nat­u­ral per­sons.”

The sec­ond, Des­mond says, is where the tax ben­e­fit of ac­cu­mu­lat­ing div­i­dends in a com­pany out­weighs the other com­mer­cial ben­e­fits of util­is­ing a com­pany for such pur­pose.

How­ever, as the pro­posed ap­proach is a sub­jec­tive one it may cre­ate some un­cer­tainty about whether a par­tic­u­lar com­pany is to be treated as a pas­sive hold­ing com­pany. Ex­clu­sions help the def­i­ni­tion. “Some of the ex­clu­sions are for cer­tain types of en­ti­ties, such as listed com­pa­nies.”

No doubt Rem­gro and other large in­vest­ment hold­ing com­pa­nies will breathe a sigh of re­lief about that.

“Oth­ers arise as a re­sult of a com­pany’s ac­tiv­i­ties, such as hav­ing more ac­tive than pas­sive in­come or dis­tribut­ing its pas­sive in­come,” says Des­mond. What’s also ex­cluded from the pas­sive hold­ing com­pany’s regime is roy­al­ties. Which prob­a­bly means as­pir­ing writ­ers – of which there must be more than 10 just on this pub­li­ca­tion – can go out and form a com­pany to col­lect the in­come when that book fi­nally gets pub­lished.

Two sets of cir­cum­stances. Tim Des­mond

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