Is your company eligible to access the reduced corporate tax rate?

22 August 2022

The Federal Government’s ‘Enterprise Tax Plan’ has seen a gradual reduction in the corporate tax rate applying to small and medium-sized companies over recent years. The reduced corporate rates were previously 27.5% from the 2017-18 to 2019-20 income years, and 26% in the 2020-21 income year.

From the 2021-22 income year, a 25% rate applies to all companies that are ‘base rate entities’.

The full corporate tax rate of 30% continues to apply to companies that are not eligible for the lower company tax rate.

What is a base rate entity?

A company is a base rate entity for an income year if:

  • the company’s aggregated turnover for that year (worked out at the end of the year) is less than $50 million; and
  • no more than 80% of the company’s assessable income in that income year is ‘base rate entity passive income’.

Each of these conditions is considered below.

Aggregated turnover is less than $50 million

The calculation of a company’s aggregated turnover includes the annual turnover of any entity that is connected to the company, or is an affiliate of the company, at any time during the year.

‘Annual turnover’ includes all ordinary income earned in the ordinary course of business for the income year. Accordingly, only the annual turnovers of those connected entities or affiliates that carry on a business are included in the calculation.

Annual turnover excludes the following amounts:

  • capital gains and franking credits;
  • GST charged on transactions;
  • income derived from the sale of retail fuel; and
  • income derived from dealings with connected entities or affiliates.

In order for an entity to be ‘connected’ with the company, the element of control must be present — for example, one of the entities must control the other entity (i.e. a parent and subsidiary), or both entities must be controlled by the same third party. The control tests are complex and incorporate both direct and indirect control.

Only an individual or a company can constitute an ‘affiliate’ of another entity. This will be the case where that individual or company ‘acts or could reasonably be expected to act, in accordance with the entity’s directions or wishes, or in concert with the entity, in relation to the affairs of the business of the individual or company’.

While it is generally more difficult to ascertain whether an entity is an affiliate of a company, we note the following:

  • trusts, partnerships and superannuation funds cannot be affiliates. Only an individual or a company can constitute an affiliate;
  • only an individual or company that conducts a business can constitute an affiliate of another entity; and
  • a director is not automatically an affiliate of a company merely because of the position held in that entity.

A company’s aggregated turnover is determined on an annual basis; its aggregated turnover for previous years is irrelevant when working out if it constitutes a base rate entity for any particular income year.

Base rate entity passive income

In order to access the 25% corporate tax rate, no more than 80% of the company’s assessable income can constitute ‘base rate entity passive income’ (BREPI).

On that basis, at least 20% of the company’s income must be ‘active’ in the sense that it is derived from business or trading activities.

The following types of income are BREPI:

  • company dividends and franking credits on those distributions — excluding non-portfolio dividends (being a dividend paid to a company where that company holds a voting interest of at least 10% in the paying entity);
  • royalties and rental income;
  • interest income (exceptions apply for financial institutions);
  • net capital gains;
  • a gain on qualifying securities; and
  • 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 BREPI.

There are some traps to be aware of in calculating BREPI. For example, the Australian Taxation Office considers that franked dividends flowing through a trust cannot be ‘non-portfolio dividends’ (and not constituting BREPI) in the hands of any ultimate corporate beneficiary. In contrast, if the non-portfolio shareholding was held directly by the company receiving the dividends, these dividends would be excluded from the BREPI calculation.

How can Rigby Cooke help?

We can assist you in determining whether your company is eligible to access the reduced corporate rate, which can include identifying connected entities and affiliates, and calculating annual turnover.

We note that a reduced 25% rate correspondingly means that the company can only frank dividends at the rate of 25%, which will increase the tax costs for shareholders when a dividend is declared.

If you would like to discuss your company eligibility, please contact our Tax team.

Disclaimer: This publication contains comments of a general nature only and is provided as an information service. It is not intended to be relied upon, nor is it a substitute for specific professional advice. No responsibility can be accepted by Rigby Cooke Lawyers or the authors for loss occasioned to any person doing anything as a result of any material in this publication.

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