From time to time there are tax changes in Australia, and the company tax rates are updated accordingly.
In some years, lower rates of tax are available or higher for certain businesses. In Australia, the company tax rate at 30% is the full rate, and this page explains how to calculate franking credits and when you can apply the lower rate.
All companies not eligible for the lower rate company tax rate will be charged 30%.
The eligibility for the lower company rate is dependent on whether you are:
- Starting with the 2017-18 income year, and continuing onwards, the base rate entity;
- For the 2015-16 and 2016-17 income year, small business entity.
Tax Changes in Australia: Base rate entity company tax rate.
Companies that are base rate entities have to apply the lower 27.5% corporate tax rate starting in the 2017-18 and 2019-20 income years. In the 2020-21 income year, the rate will be 26% and then 25% in the 2021-22 income years and subsequent years.
A company is considered a base rate entity for an income year if it:
- The aggregated turnover of the company for this income year is lower than the threshold;
- It earns 80% or less of the base rate entity passive income for the income year. This replaces the requirement that they be running a business starting in 2017-18.
For the 2017-18 income year, the aggregated turnover threshold is $25 million, and $50 million for the 2018-19 income year and each subsequent income year.
IT DOESN’T MATTER IF THE COMPANY HAS A PRIOR INCOME YEAR.
Passive income at the base rate entity is:
- Distributions to corporate entities and franking credit on these distributions;
- Rent and royalties;
- Interest income (with some exceptions);
- Qualified securities can earn you a profit;
- A net capital gain;
- The amount included in assessable income for a partner in partnership or beneficiary of the trust to the extent that it can be traced (directly or indirectly) back to base rate entity passive income.
Tax Changes in Australia: The tax rate for small business entities.
To be eligible for the low company tax rate in 2015-16 and 2016-17 income year, you must be a small business entity.
The 2015-16 income year saw a lower company tax rate of 28.5% for small businesses entities.
- For the 2015-16 income year, where there was a total turnover of less than $2 million;
- You continue to run the business throughout the year.
The lower company tax rate for 2016-17 was 27.5%. Small businesses who:
- For the 2016-17 income year, have an aggregated turnover of less than $10,000,000
- Continue the business for part or all of the year.
To be eligible for the lower rate of tax, you must be a base-rate entity in 2017-18 and beyond.
Tax Changes in Australia : Not-for-profit companies.
You don’t have to pay tax on the first $416 of your income if you are a non-profit organization. The excess $416 is subject to tax at 55% until your tax liability equals the company’s tax rate, then the company tax rate applies to you.
If you are a base-rate entity, the limit for not-for-profit companies is:
- $788 for 2020-21 income year
- $762 for the 2021-22 income years and subsequent years.
Tax Changes in Australia : Maximum franking credits.
For the calculation of the company tax rate to franke your distributions (also known as the ‘corporate tax rate for imputation purposes’), you will need to assume that your aggregated turnover, assessable, and base rate entity passive income will remain the same as in the previous income year.
For imputation purposes, your corporate tax rate if you are a base-rate entity is 27.5% for 2017-18 to 2019-20 income years. It will be 26% in the 2020-21 income year, and 25% in the 2021-22 income years.
If you are a base-rate entity, one of the following applies:
- Your income year’s aggregated turnover was less than $50,000,000, and less than 80% of your income was passive base rate income.
- This entity did not exist in the previous income years.
IF YOU DO NOT MEET THE TWO POINTS ABOVE, THE CORPORATE TAX RATE APPLICABLE TO IMPUTATION PURPOSES WILL BE 30%