The tax office has potentially opened 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 wave of future ­refunds, reports The Australian.

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.

Since 2015, 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 Australian Taxation ­Office’s ruling could mean significant 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.

The Australian understands that the little-known refund issue and the key ATO draft ruling were discussed at length at a high-powered meeting of the National Tax Liaison Group in Melbourne late last month — a meeting ­attended by some of the most senior officials from the ATO, federal Treasury and the tax industry.

News of what was discussed at the meeting has in recent days spread through the top echelons of the accounting profession. As BDO senior tax partner Tony Sloan notes: “Everyone is talking about it. The issue is massive. It ­affects a lot of our clients.”

However, there could be a sting in the tail if family companies don’t plan their affairs properly. Mr Sloan warned that 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”.

The apparent change of ATO policy emerged in the fineprint of an unrelated draft tax ruling on whether offshore companies were resident in Australia. In it, the ATO appeared to open the way to a broader interpretation of company tax cuts introduced from last year, which saw the tax rate fall from 30 per cent in 2015 to 28.5 per cent in the 2016 financial year and 27.5 per cent in the 2017 financial year and future years.

Until the ATO’s draft ruling was issued in March, it had been thought that Australia’s many passive investment vehicles — those mainly used by families and investors to take advantage of a corporate tax rate lower than the general income tax rate — would not be entitled to this cut.

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.”

Sources at the meeting said 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.

Article compliments IFC Review.