Changes, changes and more changes- Bringing forward the company tax cuts
Following on from the various changes to company tax rates earlier in the year, the Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018 was introduced and passed by the Senate relatively quickly last week. The Bill proposes to bring forward the tax cuts for small and medium businesses. The Bill is currently awaiting Royal Assent.
The proposed changes
Certain companies, known as Base Rate Entities (BREs), are eligible for the lower corporate tax rate of 27.5%. It was legislated to reduce the corporate tax rate to 25% for such entities by the 2026-27 year with the first tax cut to 27% taking effect from the 2024-25 financial year. A summary of the proposed income tax rates are as follows:
| Financial year |
New law |
Old law |
| 2017-18 |
27.50% |
27.50% |
| 2018-19 |
27.50% |
27.50% |
| 2019-20 |
27.50% |
27.50% |
| 2020-21 |
26% |
27.50% |
| 2021-22 |
25% |
27.50% |
| 2022-23 |
25% |
27.50% |
| 2023-24 |
25% |
27.50% |
| 2024-25 |
25% |
27.00% |
| 2025-26 |
25% |
26.00% |
| 2026-27 |
25% |
25.00% |
Base rate entities
The above rates do not apply to all companies but only BREs. BREs are entities with an aggregated turnover of less than $50 million which receive less than 80% income from passive sources (also known as Base Rate Entity Passive Income).
Therefore, although a company may not be carrying on a business, it may still receive the reduced corporate tax rates if 20% or more of the income it receives is not from passive sources (for instance, distribution of business income from a trading trust).
Base Rate Entity Passive Income
The following are considered Base Rate Entity Passive Income for the purposes of these rules:
- Dividends (incl. franking credits) from entities where you own less than 10% of the shares;
- Royalties;
- Rent (irrespective of whether it is commercial or residential);
- interest income;
- gains on qualifying securities;
- a net capital gain;
- partnership income to the extent it is traceable (either directly or indirectly) to an amount that is otherwise base rate entity passive income (interest, rent etc);
- trust income to the extent it is traceable (either directly or indirectly) to an amount that is otherwise base rate entity passive income (interest, rent etc).
Please speak to your advisor at Moore Stephens if you would like further information about this or if you would like to know how this affects your business.