• Reducing the corporate tax rate

    In the 2016–17 Budget, the Government announced that it intended to progressively reduce the corporate tax rate from 30 per cent to 25 per cent. These changes were outlined in the Enterprise Tax Plan 2016 Bill. Amendments were made to this Bill by the Senate on 31 March 2017. The amendments were accepted by the Government and 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 to increase the scope of which corporate entities would be eligible for the lower corporate tax rate in future years.

    Enterprise Tax Plan 2016

    The corporate tax rate is reduced from 28.5% to 27.5% for the 2016–17 income year for small business entities. To be considered a small business entity you must:

    • be carrying on a business for all or part of the income year, and
    • have an aggregated turnover of less than $10 million (which is an increase from $2 million in previous years).

    In 2017–18 the threshold increases from $10 million to $25 million and in 2018–19 to $50 million. From 2017–18, corporate entities eligible for the lower tax rate will be known as base rate entities, i.e. the small business definition will remain at $10 million from 2017–18 onwards while the base rate entity threshold will continue to rise.

    The tables below outline the changes to the turnover threshold and how the tax rate further reduces from 2024–25 onwards.

    Small business entities

    Year

    Aggregated annual turnover threshold ($m)

    Entities under the threshold

    Other corporate tax entities

    2015–16

    $2m

    28.5%

    30.0%

    2016–17

    $10m

    27.5%

    30.0%

    Base rate entities

    Year

    Aggregated annual turnover threshold ($m)

    Entities under the threshold

    Other corporate tax entities

    2017–18

    $25m

    27.5%

    30.0%

    2018–19

    $50m

    27.5%

    30.0%

    2019–20 to 2023–24

    $50m

    27.5%

    30.0%

    2024–25

    $50m

    27.0%

    30.0%

    2025–26

    $50m

    26.0%

    30.0%

    2026–27

    $50m

    25.0%

    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 that particular year, unless the entity's turnover for the prior year is equal or greater than the threshold for the current year. This is known as the corporate tax rate for imputation purposes.

    Enterprise Tax Plan No. 2 2017

    The Government introduced a second Bill that will progressively extend the lower corporate tax rate to all corporate entities. The table below outlines the proposed changes and timeframes.

    Year

    Aggregated annual turnover threshold ($m)

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

    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

    All corporate entities

    27.5%

    n/a

    2024–25

    All corporate entities

    27.0%

    n/a

    2025–26

    All corporate entities

    26.0%

    n/a

    2026–27

    All corporate entities

    25.0%

    n/a

    When does a company carry on a business?

    Consultation and guidance

    The ATO is currently consulting through the Tax Practitioner Stewardship Group on this issue and is intending to provide guidance on this matter. The form of the guidance has not yet been settled.

    What is the ATO's view as to when a company will carry on a business?

    It is not possible to definitively state whether a particular company is carrying on a business. This is always question of fact. Based on the overall impression of the activities of a company and the relevant indicia of whether a business is carried on.  However, where a company is established and maintained to make profit for its shareholders, and invests its assets in gainful activities that have a prospect of profit, then it is likely to be carrying on business. This is so even if the company’s activities are relatively passive, and its activities consist of receiving rents or returns on its investments and distributing them to shareholders.

    While most companies will carry on a business in a general sense, this does not mean that every gain made by a company will be ordinary income and assessable under section 6-5 of the ITAA 1997.  It is still necessary to determine the scope and nature of that business, in order to determine whether a gain will be an ordinary incident of that business and therefore assessable as ordinary income rather than a capital gain.

    Administrative treatment

    PAYG Instalments

    From June 2017 activity statements will incorporate the lower (27.5%) tax rate for eligible companies.

    If you think you are eligible, but your current activity statement does not reflect the reduction in corporate tax rate, you can vary your instalment rate or amount yourself. Companies that choose to vary to reflect the rate reduction will not be subject to a variation penalty.

    For more information see our How to vary the amount you pay.

    Income Tax Returns

    The ATO has commenced processing eligible 2016–17 company tax returns at the 27.5% tax rate. Where a company has lodged their 2016–17 tax return using the 28.5% tax rate we will identify them and amend them. Where a company has lodged their 2016–17 tax return using the 30% tax rate, but now believe they are entitled to the 27.5% tax rate, they should seek an amendment as we are unable to accurately identify these taxpayers.

    Franking issues

    In the 2016–17 and future income years, the maximum franking credit that can be allocated to a distribution is based on a corporate tax entity's applicable corporate tax rate for that income year. This is 27.5% for a small business entity for their 2016–17 income year. Different rules apply to small business entities in the 2015–16 income year.

    Where a small business has issued 2016–17 distributions based on a 30% corporate tax rate, they should notify their members of the correct dividend and franking credit amounts based on the 27.5% tax rate. They can do this by sending a letter or email to their members. The ATO should also be notified of the correct amounts through the company's annual dividend reporting process.

    Care should also be taken to ensure the correct amounts are reflected in the Franking account.

    For more information on this issue see our Practical Compliance Guideline 2017/07.

    Legislation and supporting material

    Treasury Laws Amendment (Enterprise Tax Plan) Act 2017External Link was introduced to the House of Representatives on 1 September 2016 and amended by the Senate on 31 March 2017. This Bill received Royal Assent on 19 May 2017.

    Treasury Laws Amendment (Enterprise Tax Plan 2) Bill 2017External Link was introduced to the House of Representatives on 11 May 2017.

    More information

      Last modified: 04 Jul 2017QC 48880