News 14th March 2021

Company Tax Changes

From the income year ended 30 June 2018, the government introduced reduced tax rates for certain corporate entities to be defined ‘base rate entities’. Companies that satisfy the criteria of a base rate entity are required to apply the lower corporate tax rate for each respective year.

A base rate entity is a company that both:

  • Has an aggregated turnover less than the aggregated turnover threshold – which is $25 million for the 2017-18 income year and $50 million from the 2018-19 income year
  • 80% or less of their assessable income is base rate entity passive income.

Base rate entity passive income is:

  • Corporate distributions and franking credits on these distributions
  • Royalties and rent
  • Interest income (some exceptions apply)
  • Gains on qualifying securities
  • A net capital gain
  • An amount included in the assessable income of a partner in a partnership or a beneficiary of a trust, to the extent it is traceable (either directly or indirectly) to an amount that is otherwise base rate entity passive income.

The below table displays the progressive changes to be applied to the company tax rate

Income year Aggregated turnover threshold Tax rate for base rate entities under the threshold Tax rate for all other companies
2017–18 $25m 27.5% 30.0%
2018–19 to 2019–20 $50m 27.5% 30.0%
2020–21 $50m 26.0% 30.0%
2021–22 and future years $50m 25.0% 30.0%

While these rules have now been in place for a number of years, perhaps a less considered concept is how these changes affect any franking credits a corporate entity may attach to a distribution. Law Companion Ruling 2019/5 identifies that:

From the 2017-18 income year, a corporate tax entity works out its corporate tax rate for imputation purposes by:

  • Assuming that its aggregated turnover, BREPI (base rate entity passive income) and assessable income are the same as in the previous income year, and
  • Applying the corporate tax rate for the current income year.

In determining the corporate tax rate for imputation purposes for an income year, a corporate tax entity does not apply the aggregated turnover threshold for the previous income year. Rather, it compares its aggregated turnover for the previous income year against the aggregated turnover threshold for the current income year.

For example, in order to determine the corporate tax rate for imputation purposes for a company for the year ended 30 June 2021, we would assume that the aggregated turnover, BREPI and assessable income were the same as for the previous year. The aggregated turnover threshold for a base rate entity for 2021 is unchanged from the previous year at $50 million. Therefore, a company that satisfied the definition of a base rate entity for the previous year would be deemed a base rate entity for imputation purposes for the year ended 30 June 2021. The company would therefore be required to frank any corporate distributions at 26.0%, being the tax rate which would be applied to the company assuming the company satisfied the eligibility requirements of a base rate entity. The franking rate for other companies would be 30.0%.

The calculations regarding the base rate entity eligibility can be complex so contact our office should you require any assistance.

 

Contact