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  • Reducing the corporate tax rate

    On 1 September 2016, the Government introduced Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 that proposed 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. This Bill received Royal Assent on 19 May 2017.

    Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 was introduced to the House of Representatives on 11 May 2017. If passed, it will progressively reduce the lower corporate tax rate to 25% for all corporate entities by 2026-27.

    On 18 October 2017, the Government introduced the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017. 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.

    Enterprise Tax Plan 2016

    Under the current law the following corporate tax rates apply.

    Small business entities changes and timeframes

    Year

    Aggregated turnover threshold

    (SBE) Corporate entities under the aggregated turnover threshold and carrying on a business

    All other corporate entities

    2015–16

    $2m

    28.5%

    30.0%

    2016–17

    $10m

    27.5%

    30.0%

    Base rate entities changes and timeframes

    Year

    Aggregated turnover threshold

    (BRE) Corporate entities under the aggregated turnover threshold

    All other corporate entities

    2017–18

    $25m

    27.5%

    30.0%

    2018–19

    $50m

    27.5%

    30.0%

    2019–20

    $50m

    27.5%

    30.0%

    The maximum franking credit that can be allocated to a frankable distribution paid by a corporate entity will be based on their applicable corporate tax rate for imputation purposes.

    More information

    Enterprise Tax Plan No.2 2017

    The Government introduced a second Bill that progressively extends the lower corporate tax rate to all corporate entities. The table below outlines the proposed changes and timeframes. This law has not yet passed.

    Proposed changes and timeframes

    Year

    Aggregated annual turnover threshold ($m)

    Entities under the threshold (base rate entities up to 2022–23)

    All other corporate tax entities

    2019–20

    $100m

    27.5%

    30.0%

    2020–21

    $250m

    27.5%

    30.0%

    2021–22

    $500m

    27.5%

    30.0%

    2022–23

    $1b

    27.5%

    30.0%

    2023–24

    No threshold

    27.5%

    27.5%

    2024–25

    No threshold

    27.0%

    27.0%

    2025–26

    No threshold

    26.0%

    26.0%

    2026–27

    No threshold

    25.0%

    25.0%

    Proposed amendment to limit the entities subject to the lower corporate tax rate

    Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 proposes to amend the law to limit the lower corporate tax rate to base rate entities with no more than 80% base rate entity passive income from 2017–18 to 2023–24. This law has not yet passed.

    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 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.
       

    Administrative treatment

    As Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 and the Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 have not passed, the existing law applies, as described below. 

    2016-17 corporate tax rate

    Companies should lodge their tax returns under the existing law. To qualify for the lower 27.5% tax rate in the 2016–17 income year a company must meet the small business entity definition which requires them to:

    • have an aggregated turnover of less than $10 million, and
    • be carrying on a business.

    2017-18 corporate tax rate

    Companies should prepare their 2017-18 income tax returns under the existing law. To qualify for the lower 27.5% tax rate in the 2017-18 income year, a company must meet the existing base rate entity definition which requires them to:

    • have an aggregated turnover of less than $25 million, and
    • be carrying on a business.

    If there are changes to this law (as proposed in the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017), companies may need to amend their 2017-18 company tax returns.

    Franking issues

    The maximum franking credit that can be allocated to a distribution for the 2016-17 and 2017-18 income years is based on a corporate tax entity's applicable corporate tax rate for imputation purposes.

    Carrying on a business

    The ATO has issued a draft Taxation Ruling on when a company carries on a business.

    Early consultation on the Ruling has highlighted a question about the provision around which the advice should be framed. The draft Taxation Ruling addresses whether a company is carrying on a business for the purpose of identifying whether it is a base rate entity in section 23AA of the Income Tax Rates Act 1986 (ITRA 1986). This is relevant for determining whether it is subject to the 27.5% or 30% corporate tax rate in the 2017/18 and later income years. The reasoning expressed in the Ruling is, however, equally applicable to determining whether a company is a small business entity within the meaning of section 23 of the ITRA 1986 and section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2015/16 and 2016/17 income years and therefore which rate is applicable to it in those income years.

    In light of this and the proposed changes to the law, the Commissioner is proposing to finalise the draft Ruling in relation to section 23 of the ITRA 1986 and 328-110 of the ITAA 1997, rather than section 23AA of the ITRA 1986 as it is presently drafted.

    Compliance approach

    We understand there has been some uncertainty about what rate to frank distributions and the company tax rate. The Commissioner will adopt a facilitative approach to compliance in relation to the application of the carrying on a business test. This means that the Commissioner will not allocate compliance resources specifically to conduct reviews of whether corporate tax entities have applied the correct rate of tax in their 2015-16 and 2016-17 company tax returns or franked at the correct rate in the 2016-17 and 2017-18 income years. 

    More information

    Legislation and supporting material

    The Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018"External Link The Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018 was introduced to House of Representatives on 18 October 2017 and is currently before the Senate.

    Treasury Laws Amendment (Enterprise Tax Plan) Act 2017External Link received Royal Assent on 19 May 2017.

    Treasury Laws Amendment (Enterprise Tax Plan No.2) Bill 2017External Link was introduced to the House of Representatives on 11 May 2017 and is currently before the Senate.

    See also:

      Last modified: 06 Aug 2018QC 48880