Changes to company tax rates

The 2016-17 Federal Budget announced changes to company tax rates which will progressively reduce the tax rate to 25%.

The company tax rate for the 2016-17 financial year is 30%, and for Small Business Entities (SBEs) the company tax rate is 27.5%

To be identified as an SBE, a company must satisfy both of the following criteria:
1. Carry on a business in that income year
2. Either in its previous year or current year have turnover less than the current year threshold (for the 2016-17 financial year this amount is $10 million)

Table 1 shows the progressive reduction in the company tax rates for the next 10 years.

From the 2017-18 financial year onwards, companies which are Base Rate Entities qualify for the lower tax rate concessions.

A Base Rate Entity (BRE) which is very similar to a SBE must meet the following criteria:
1. Carry on a business in that income year
2. Has turnover less than its current year threshold (for the 2017-18 year this amount is $25m).

On 18 October 2017 a bill was proposed to change the definition of a Base Rate Entity for the 2017-18 year to replace the ‘carrying on a business’ criteria to an 80% passive income test.

Passive income includes:
• Dividends other than non-portfolio dividends
• Interest income, royalties and rent
• Dividends (except non portfolio dividends)
• Trust / partnership distributions which are passive

Under this proposed change a company will not qualify for the lower tax rate if more than 80% of the income is passive income, even if the company is carrying on a genuine business.

The 80% passive income test is only a proposed change by the federal government. It may be some time before we know which tax rate will need to be used for certain companies. The government’s goal with the reduction to company tax rates is to implement a 25% tax rate for all companies around the year 2027. This will hopefully make Australian companies more competitive with other world wide companies.

Table 1:

Income Year Turnover Threshold Lower Rate
2015-16 $2m 28.5%
2016-17 $10m 27.5%
2017-18 $25m 27.5%
2018-19 – 2023-24 $50m 27.5%
2024-25 $50m 27.5%
2025-26 $50m 26.0%
2026-27 $50m 25.0%

Author:  Rhys Frewin