A major company tax break is just around the corner

The Federal government has been pushing for lower corporate tax rates for quite some time now. Yet, even in this climate, certain entities may be forgiven for feeling left behind.

The Base Rate Entity Passive Income – the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 seeks to redress this.

Companies that derive passive income and bucket companies will benefit. This Bill proposes to remove the “carrying on a business” test from the 2017–18 income year for the purpose of accessing the lower company tax rate and introduces a passive income test. If you carry on a business yet derive a passive income, such as from interest and dividends rather than from day to day business, then currently you still face a tax rate of 30%. Likewise, this rate applies if you manage a bucket company. These are companies set up to receive trust distributions so that the tax is capped at the current flat rate of tax. These companies hold money for future investments. At present, if a trust distributes dividends from a small business entity then the franking percentage is only 27.5% (the rate of tax for a small business entity) whilst the bucket company tax rate is 30%. This means that your bucket company pays an extra 2.5% tax.

The Bill, currently before the Senate, seeks to ensure that these companies enjoy a rate that aligns with the company tax rate.

This in turn seeks to ensure tax breaks for corporate entities such as these align with plans for general reductions in the corporate tax landscape.

Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 aims to reduce the corporate tax rate for corporate entities that are carrying on a business and have an aggregated turnover of less than $25 million for the 2017-18 income year and less than $50 million for the 2018–19 income year – known as base rate entities.

Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 aims to progressively reduce the lower corporate tax rate to 25% for all corporate entities by 2026-27.

The corporate tax rate is currently legislated to be reduced to 27.5 per cent in 2017/18 for base rate entities. The aggregated turnover threshold used to qualify as a base rate entity will increase to $50 million in 2018/19.

Reduction of corporate tax rates ATO 2017-2019

The aggregate turnover threshold is proposed to be removed from 2023/24 and the 27.5 per cent tax rate will apply for all corporate entities. The corporate tax rate is then proposed to be progressively reduced for all entities to 27 per cent in 2024/25, 26 per cent in 2025/26 and 25 per cent in 2026/27 (as the following table from the ATO demonstrates).

Reduction of corporate tax rates ATO

The Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 impacting passive income companies and bucket companies follows suit. If passed, only corporate entities who meet the aggregated turnover threshold and have no more than 80% base rate entity passive income will be eligible for the lower corporate tax rate. The date of effect will be from the 2017–18 income year.

Under the proposed law, a corporate entity is a base rate entity and will receive the lower corporate tax rate from the 2017–18 income year, if they:

  • have an aggregated turnover less than the relevant threshold
  • have no more than 80% base rate entity passive income.

This passive income includes:

  • dividends other than non-portfolio dividends
  • franking credits on such dividends
  • non-share dividends
  • interest income (some exceptions apply)
  • royalties and rent
  • gains on qualifying securities
  • net capital gains
  • income from trusts or partnerships, to the extent it is referable (either directly or indirectly) to an amount that is otherwise base rate entity passive income.

Calibre has kept a careful eye on this changing corporate tax landscape. Our advisors and tax accountants are at hand to assist you in finding the most efficient tax plan for your corporate entity.

Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.