There’s finally some certainty about the corporate tax rate(s). Legislation has recently passed Parliament and the fate of other proposed changes has also been finalised.
The rate of 27.5% applies to corporate tax entities known as “base rate entities”. These are companies which carry on a business and have an aggregated turnover of less than $50 million. The ALP has confirmed that it will not change the rules for base rate entities if elected – so there we have our first certainty. Namely, that the rate for base rate entities is locked in at 27.5% until 2023-24. The tax rate for all other companies remains at 30%, ie the standard corporate tax rate. This will not change.
Legislation that proposed to progressively extend the 27.5% corporate tax rate to all companies regardless of turnover did not make it through the Senate, and the Government has since announced that it would not proceed with this proposal. This provides us with our second certainty – there will be no changes to the standard corporate tax rate.
The tax rate for base rate entities is scheduled to reduce after 2023-24. It is reasonable to state this as the third certainty – that the tax rate for base rate entities will decline progressively to 25% by 2026-27.
A base rate entity will only qualify for the lower 27.5% rate for a particular year if its passive income is less than 80% of its assessable income (and its aggregated turnover is less than $50m). And what qualifies as “base rate entity passive income”? Dividends and the associated franking credits to start with. Interest (or a payment in the nature of interest) also qualifies – but not if the entity is a financier – as well as royalties and rent. Another key area that qualifies as base rate entity passive income is net capital gains. This could be important for smaller companies – in that the sale of a substantial asset could shake the income mix and possibly put access to the lower rate at risk.
If you are not sure of the implications of the new company tax rates, we can help. For example, if your business operates via a company, it may be worthwhile using the CGT rollover provisions to transfer assets into a separate entity. The split 27.5%/30% rate also has implications for the imputation system and franking credits, which we would be happy to discuss.