New legislation has been passed that affects the base company tax rate, decreasing the tax rate from 30% to 27.5%, and then further decreasing to 26% and then 25%. Great, you may say, but there are other factors that could affect the eligibility of your company.
There are two tests used to determine if your company qualifies for the lower corporate tax rate. The full company tax of 30% applies to all companies that are not eligible for the lower company tax rate. Eligibility depends on whether your company is a base rate entity for the 2017 to 2021 income years, or a small business entity for the 2015 to 2017 income years.
A base rate entity is a company that has an aggregated turnover which is less than the relevant aggregated threshold, and no more than 80% of their assessable income is from “base rate entity passive income” as outlined below.
Base Rate Entity Passive Income
Base rate entity passive income comes from many sources, and includes:
- Corporate distributions and franking credits on these distributions
- Royalties and rent
- Interest income
- Gains on qualifying securities
- A net capital gain
- An amount included in the assessable income of a partner in a partnership or trust.
From the 2017–18 to 2019–20 income years, companies that are base rate entities must apply the lower 27.5% company tax rate. The rate will then reduce to 26% in the 2020–21 income year and 25% in the 2021–22 income year.
What Is An Aggregated Turnover Test?
Aggregated turnover is not as simple as looking only at a company’s turnover. An entity’s aggregated turnover is the sum of:
- The annual turnover for the income year
- The annual turnover for the income year of a connected entity
- The annual turnover for the income year of an affiliate to your company
Progressive Changes To The Company Tax Rate
If you are a base rate entity, the tax rates will slowly decrease.
|Income Year||Aggregated turnover threshold||Tax rate for base rate entities under the threshold||Tax rate for all other companies|
|2018-19 to 2019-20||$50m||27.5%||30.0%|
|2021-22 and future years||$50m||25.0%||30.0%|
Small Business Entity Company Tax Rate
Your business needs to be classified as a small business in the eyes of the Australian Taxation Office to be eligible for the lower company tax rate in the 2015-16 and 2016-17 income years. For the 2016-17 income year, the lower tax rate is 27.5%.
This will apply if your business has an aggregated turnover less than $10 million and you are carrying on a business for all or part of the year. For the 2017-18 income years and onwards, your business will need to be a base rate entity, rather than classified as a small business, to be eligible for the lower tax rate.
Income Tax Concessions
Even if your business does not apply for a lower company tax rate, there are concessions your small business might be eligible to receive. Eligibility depends on your small businesses’ turnover threshold.
From 1 July 2016, the turnover threshold is $5 million for the small business income tax offset and $10 million for all other income tax concessions. The turnover threshold up to 30 June 2016 was $2 million.
Pro Tax Tip: If you’re not a small business because of your turnover, some income tax concessions may still be available to you. Your ITP Tax Accountant can advise.
Turnover for the following table is ‘aggregated turnover’. Various concessions start from 1 July 2016.
|Concessions||Turnover less than $2 million||Turnover $2 million to less than $5 million||Turnover $5 million to less than $10 million||Turnover $10 million to less than $50 million||Turnover $50 million to less than $500 million||Turnover $500 million to less than $5 billion|
|Simplified depreciation rules – instant asset write-off||Yes||Yes||Yes||Yes||Yes||No|
|Backing business investment – accelerated depreciation||Yes||Yes||Yes||Yes||Yes||No|
|Temporary full expensing||Yes||Yes||Yes||Yes||Yes||Yes|
|Accelerated depreciation for primary producers||Yes||Yes||Yes||Yes||Yes||No|
|Deductions for professional expenses for start-ups||Yes||Yes||Yes||Yes||No||No|
|Immediate deductions for prepaid expenses||Yes||Yes||Yes||Yes||No||No|
Calculating And Paying Income Tax
|Concession||Turnover less than $2 million||Turnover $2 million to less than $5 million||Turnover $5 million to less than $10 million||Turnover $10 million to less than $50 million|
|Lower company tax rate changes||Yes||Yes||Yes||Yes|
|Increased small business income tax offset||Yes||Yes||No||No|
|PAYG instalments concession||Yes||Yes||Yes||Yes (From 1 July 2021)|
There are other deductions, concessions and tax offsets your business might be eligible for. An ITP Tax Accountant will be able to guide you in the right direction and arrange for your small business to receive these benefits. It pays to have a regular conversation with your ITP Tax Accountant to keep on top of what you might be eligible to receive in order to organise the records you’ll require.
Determining if your company is eligible for the lower corporate tax rate and if your small business fits the aggregated turnover test and base rate entity can be difficult. Phone 1800 367 487 and chat with a friendly ITP Tax Accountant who will help.