Company tax rate changes in 2021

Background

The company tax rate for the year commencing 1 July 2020 is reduced to 26% (and will be further reduced to 25% for the year commencing 1 July 2021).

This reduction in the company tax rate was legislated through the passing of the The Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018  by Parliament in October 2018.

Eligibility

Companies will be eligible to access this reduced company tax rate of 26% in the 2021 income year if they are a Base Rate Entity’ (BRE) in the respective year.

For the 2021 income year, a BRE is a company that satisfies the following requirements:

  1. Has an aggregated turnover of less than $50 million in the year; and
  2. 80% or less of its total assessable income is Base Rate Entity Passive Income (BREPI).

Base Rate Entity Passive Income

BREPI includes passive income such as rent, interest, dividends (excluding non-portfolio dividends), net capital gains and amounts that are included in partnership or trust distributions to that extent they are attributable to an amount of BREPI of the partnership or trust. Law Companion Ruling LCR 2019/5 provides more guidance on this type of income.

Where a trust distribution received by company consists of only business trading income of the trust, this trust distribution will not be treated as BREPI.

All other companies that are not BREs will be subject to the 30% company tax rate. This will include companies that are investment companies and in receipt of only passive income (i.e. rent, dividends etc.).

Dividends paid in 2021 – maximum franking credits

The reduced company tax rate will also impact the way a BRE pays dividends in the 2021 income year.

The maximum franking credits that a company can pay on its dividends is based on its corporate tax rate for imputation purposes.

To work out the corporate tax rate for imputation purposes for the 2021 income year, you need to assume the company’s aggregated turnover, assessable income and BREPI is the same as in the previous income year i.e. for the 2021 income year, your corporate tax rate for imputation purposes is 26% if either:

  • your aggregated turnover in the 2020 income year was less than $50 million, and 80% or less of your assessable income was BREPI; or
  • the entity did not exist in the previous income year.

Shareholders will need to be aware of this, as they will potentially be subject to top up tax at the shareholder level (i.e. individuals with high marginal tax rate).

Example

Uncle Tony’s Bakeries Pty Ltd had an aggregated turnover of $10 million in the 2020 income year, and was taxed at 27.5% as it was a BRE. It had no other income in the 2020 income year.

Uncle Tony’s Bakeries Pty Ltd was a BRE in the 2020 income year.

In the 2021 income year, it has paid a dividend of $100,000. To determine the franking credit attached to this dividend, it will need to determine its corporate tax rate for imputation purposes.

To calculate the corporate tax rate for imputation purposes, Uncle Tony’s Bakeries Pty Ltd will have to assume its aggregated turnover in the 2021 income year is the same as it was in the 2020 income year (I.e. $10 million).

Therefore, Uncle Tony’s Bakeries Pty Ltd will have a corporate tax rate for imputation purposes of 26% in the 2021 income year, as its turnover is less than $50 million and it is a BRE.  As such, the maximum franking credits that Uncle Tony’s Bakeries Pty Ltd can attach to the $100,000 dividend will be as follows:

$100,000 x 26% / (100% – 26%) = $35,135.

Federal Budget 6 October 2021

As noted above, the company tax rate is legislated to be reduced to 25% in the 2022 income year.  There has been speculation that personal tax cuts for future income years may be brought forward in this year’s Federal Budget in light of the economic climate brought on by the Coronavirus pandemic. Given our relatively high corporate tax rate by international standards, it remains to be seen whether the Government acts to further reduce the corporate rate in the upcoming Budget as part of any wider tax reforms.