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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. It proposed to progressively reduce the lower corporate tax rate to 25% for all corporate entities by 2026–27. This Bill is not proceeding.

    On 18 October 2017, the Government introduced the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017. Under this Bill, 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. This Bill received Royal Assent on 31 August 2018.

    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 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 imputation purposes.

    More information

    Amendment to limit the entities subject to the lower corporate tax rate

    Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act 2018 amends 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.

    Under the new 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 the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act 2018 has now passed and the Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 is not proceeding, the 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 new law. To qualify for the lower 27.5% tax rate in the 2017–18 income year, a company must meet the new base rate entity definition which requires them to:

    • have an aggregated turnover of less than $25 million, and
    • have no more than 80% of their assessable income as base rate entity passive income.

    If companies have already lodged their 2017–18 company tax returns based on the previous law, they should review their position and lodge an amendment if required.

    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.

    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) Act 2018External Link received Royal Assent on 31 August 2018.

    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 is not proceeding.

    See also:

      Last modified: 04 Sep 2018QC 48880