Previously, there was uncertainty around this with a draft ruling from the ATO stating that the tax cut for small business would also apply to passive investment companies and corporate beneficiaries of family trusts.

The exposure draft bill amends the tax law to ensure that a company will not qualify for the lower company tax rate if 80 per cent or more of its income is of a passive nature such as dividends and interest.

“The Turnbull government is committed to lower taxes on business because we want to see them invest and grow,” Ms O’Dwyer said.

“These amendments will provide greater clarity about who qualifies for the lower company tax rate by excluding passive investment companies.”

Chartered Accountants Australia and New Zealand’s (CA ANZ) head of tax, Michael Croker, welcomed the news of the draft legislation and announced that CA ANZ will make a submission.

“The government’s decision to amend the law is a welcome circuit breaker for an issue that has caused much confusion,” Mr Croker said.

However, Mr Croker highlighted that the 80 per cent test will create another non-tax issue to small business companies to manage.

“Accountants will road-test the 80 per cent threshold through their small company client base to determine the impact,” he said.

“One area of concern is the year-to-year nature of the test. There could be scenarios – such as where an active business has been sold and the company directors take time to purchase or commence a new business – where there’s money just sitting in the bank account earning interest.”

BDO tax partner Mark Molesworth also welcomed the move which he labelled as “unexpected”.

“The rules have been changed so that as soon as 80 per cent of a company’s income comes from ‘passive’ sources, it cannot use the lower tax rate, irrespective of its aggregated turnover. Passive income includes dividends, interest, royalties and partnership and trust distributions attributable to passive sources,” Mr Molesworth said.

“Therefore corporate beneficiaries of trusts that carry on an active business can take advantage of the lower tax rate. A similar tracing approach applies to dividends received from companies in which a shareholding of at least 10 per cent is held. This is an unexpected, but welcome, outcome.”

Mr Molesworth highlighted that given the amendments only apply to the year ended 30 June 2017 and later years. Some passive income companies may need to review their tax return for the 2016 year.