Company tax rates: difficulties with the current state of play

The rules for determining which tax rate applies to company taxpayers have changed significantly over the past two years and are still undergoing change.

The current rules provide that the lower tax rate of 27.5% applies to a company carrying on a business with turnover (combined with certain connected entities) less than a particular threshold, which was $10 million in the 2016/17 income year and $25 million in the 2017/18 income year. The ATO has issued a Taxation Ruling setting out their view on whether or not a company is carrying on a business. Unfortunately this Taxation Ruling is still in draft form and has not been finalised.

For the 2017/18 income year there is legislation before Parliament to remove the requirement that a company be carrying on a business and to instead introduce a passive income test for determining which companies are eligible for the lower tax rate.

It is critical that when determining which tax rate applies to a company that a year by year approach is taken. If the draft legislation is passed, it is possible and indeed likely that many companies who were eligible for the lower tax rate in the 2016/17 income year will not be eligible in the 2017/18 year.

Once a company is eligible for the lower tax rate, it is likely that in the following income year they will only be able to frank dividends paid to shareholders at 27.5%. Where the company’s franking account came about from payments of tax at the full 30% rate, there will be a wastage of franking credits for the difference. For companies with large franking accounts the tax impact of this wastage could be significant.

We are exploring opportunities to reduce this franking credit wastage in affected companies.

 

UPDATE: The Act introducing the base rate entity concept, referred to in this article as a ‘passive income test’, was given royal assent on 24 August 2018 and is now in effect. Also for 2018/19 and future income years the relevant turnover threshold has been increased to $50 million.

Recent Articles

A new sophisticated scam targets Australian businesses: what to look out for

26th November 2020

An article from the ABC details a shocking new scam that is targetting Australian business owners. Business email comprimise scams... Read More

Beware of scammers pretending to be the ATO warning of tax debt

22nd October 2020

The ATO is warning community members after an increasing number of people are paying fake tax debt due to... Read More

Farmers make use of RAA subsidies for succession & estate planning advice

25th September 2020

This blog article follows on from our previous article Get in quick! Subsidised business & estate planning advice for farmers... Read More

JobKeeper extension – what you need to do as a business or not-for-profit

25th September 2020

The ATO has released a practical factsheet outlining all the practical steps required to be followed for businesses or... Read More