There are two company tax rates, the full company tax rate and the lower company tax rate.
The full company tax rate is 30% and the lower company tax rate is 27.5%. In general, company tax rates apply to companies, corporate unit trusts, and public trading trusts.
There has been a proposed law (Enterprise Tax Plan Base Rate Entities) to apply the lower corporate tax rate to all corporate entities with no more than 80% base rate entity passive income from 2017–18 to 2023–24.
Who is eligible for the lower company tax rate?
First, you need to be classified as a “base rate entity” company. Base rate entities must apply the lower company tax rate for the 2017-18 income year. To be a base rate entity company, you will have to meet the following:
- Have less than the aggregated turnover threshold ($25 million for the 2017–18 income year)
- Function and carry on a business.
Small businesses no longer can apply the lower company tax rate for the 2017-18 income year.
For the last two income years, small businesses were eligible for the lower company tax rate who carried on a business for all or part of the year. For the 2015–16 income year, the lower company tax rate was 28.5% for small business entities and have an aggregated turnover of less than $2 million.
On the other hand, in the 2016–17 income year, the lower company tax rate was 27.5%. However, they would have to have an aggregated turnover of less than $10 million.
You must be below the 80% base rate entity passive income.
Here are some examples the ATO provides you with that qualifies as passive income for base rate entities.
- Dividends & Non-share Dividends (not non-portfolio dividends)
- Franking credits on the dividends
- Interest income (some exceptions apply)
- Gains on qualifying securities
- Net capital gains
- Trust or partnership income
Franking credits will change.
If you weren’t aware, for every distribution a corporate tax entity makes, franking credits are allocated to the members or shareholders.
The maximum franking credit that you can for the 2017-18 income year is 27.5% if:
- In 2016–17, your aggregated turnover was less than $25 million in your business.
- It is the first year you are carrying out your business.
If you do not meet the following above, you are then subject to the full company tax rate of 30%. For more information, click here to find out how to calculate your franking credits.
How do I let the ATO know about my lower tax rate?
The ATO advises taxpayers to follow the existing law to prepare your 2017-18 tax returns. In order to apply for the 27.5% corporate tax rate, you will need to complete the checkbox in the ‘Status of company’ section of the return form. Otherwise, the companies that are not base rate entities will stay at the full company tax rate of 30%.
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