The company tax rates have now undergone revisions. With a standard rate of 30%, and the possibility of lower company tax rates being applicable in certain years. However, before celebrating, let’s dive in and figure out where exactly we can do this. As you know, with tax, it can get a little bit complicated. Also, please don’t use this as a guide for determining what rate to use. You need to contact an accountant to get to that point with some degree of confidence. But this makes for a good overview I think.
Company Tax rates
As per the ATO site, company tax rates are applicable to various entities, including:
-Corporate unit trusts
-Public trading trusts
The standard company tax rate of 30% is imposed on all companies i.e. those that do not meet the criteria for the lower company tax rate. Qualification for the lower company tax rate is contingent upon whether an entity is classified as a base rate entity. This starts from the 2017–18 income year and beyond.
Base rate entity rate
Starting from the 2021–22 income year onwards, companies classified as base rate entities are obligated to adhere to the 25% company tax rate. Prior to this, the rate was 27.5% for the income years spanning from 2017–18 to 2019–20 and 26% for the 2020–21 income year.
A company is designated as a base rate entity for a given income year if it meets two criteria:
The company’s aggregated turnover for that income year is below the specified aggregated turnover threshold for that year.
The company has 80% or less of its assessable income in that income year categorized as base rate entity passive income. This criteria has replaced the requirement to be actively conducting a business. Again, effective from the 2017–18 income year onward.
The aggregated turnover threshold was $25 million for the 2017–18 income year and increased to $50 million starting from the 2018–19 income year.
I think it is important to note that the aggregated turnover from previous income years does not factor into the determination of whether a company qualifies as a base rate entity for a specific income year.
Base rate entity (whose definition frustrates many) passive income encompasses the following:
-Corporate distributions and the associated franking credits on these distributions.
-Royalties and rent.
-Interest income (with some exceptions).
-Gains derived from qualifying securities.
-A net capital gain.
-Any amount included in the assessable income of a partner in a partnership or a beneficiary of a trust, to the extent that it can be traced (either directly or indirectly) to an amount that is otherwise considered base rate entity passive income.
Small business entity
Starting from the 2017–18 income year and beyond, eligibility for the lower tax rate depends on being classified as a base rate entity, as opposed to a small business entity.
For detailed guidance on determining when a company is considered to be actively conducting a business, you can refer to Taxation Ruling TR 2019/1 titled “Income tax: when does a company carry on a business?” This ruling provides comprehensive information and criteria for assessing whether a company is engaged in business activities for tax purposes.
Not for profits
For not-for-profit companies classified as base rate entities, the threshold at which they begin to pay tax is as follows:
$788 for the 2020–21 income year.
$762 for the 2021–22 income year and subsequent years.
For these entities, they don’t incur tax on the first $416 of their taxable income, and after this threshold, they pay tax at a rate of 55% on the income that exceeds $416. This continues until the tax on their taxable income effectively equals the company tax rate, at which point they are then taxed at the standard company tax rate.
For the maximum franking credits
To calculate the corporate tax rate for franking distributions, also known as the ‘corporate tax rate for imputation purposes,’ certain assumptions are made regarding your aggregated turnover, assessable income, and base rate entity passive income, presuming they will remain the same as the previous income year.
If you qualify as a base rate entity, the corporate tax rate for imputation purposes was:
27.5% for the income years spanning from 2017–18 to 2019–20.
26% for the 2020–21 income year.
25% starting from the 2021–22 income year onwards.
(On an unrelated note, for some, watch out for the changing superannuation rate and the venomous director penalties the ATO dishes out generously)
An entity is considered a base rate entity if either of the following conditions applies:
The aggregated turnover in the previous income year was below $50 million, and 80% or less of the assessable income was categorized as base rate entity passive income.
The entity did not exist in the previous income year.
For entities that do not meet the criteria outlined above, the corporate tax rate for imputation purposes remains at 30%, as you probably guessed.
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