Companies will now face new eligibility requirements to apply the lower corporate tax rate of 27.5% due to legislation changes introduced on 31 August 2018. These new rules have been brought in to provide clarity and certainty for companies with income from non-business activities. For example, companies that hold investments or receive only distributions from trusts (“bucket companies”) may no longer be able to access the lower tax rate.
The full company tax rate is 30% whereas the lower company tax rate is 27.5%. To be eligible for the lower company tax rate of 27.5% you must be classed as a ‘base rate entity’ from the 2017-18 income year.
To be a base rate entity you must have:
A turnover less than $25 million
(this turnover threshold increased to $50 million from 2018-19)
80% or less of its assessable income as passive income
(for example, interest, dividends or rent). This replaces the 'carrying on a business' test.
What you need to do:
Check if your company has earned 80% or less passive income and if so apply the lower rate of 27.5% when completing your company tax return (if you have more, apply the full rate of 30%).
If you've already lodged your 2017-18 company tax return using the incorrect rate, you will need to make an amendment.
When working out the company tax rate to use for franking your distributions, use your previous year's turnover, assessable income and base rate entity passive income to determine the correct rate.
If you’ve issued distribution statements using the incorrect rate, you should tell your shareholders the correct dividend and franking credit amounts as soon as possible. You should also let the ATO know the correct amounts through your company's annual dividend reporting process.
If you need any assistance with working out your company tax rate, please contact our office via email or phone (07) 3446 5906. For further information from the ATO on the company tax rate changes please click here.