There has been significant media coverage of the Government's proposed tax cuts for business and the compromises and adjustments necessary to pass legislation through the Senate. It has taken a while but the Government recently passed the legislation to enable certain companies to pay tax at a rate of 27.5%.
An eligible company will be one that is a "base rate entity", which requires:
aggregated turnover of less than $25 million for year ended 30 June 2018 or $50 million from 1 July 2018 and
no more than 80% of the company’s assessable income being "passive" in nature (such as interest or rent).
Companies that do not meet these requirements will continue to pay tax at the rate of 30%.
The reduction in the tax rate to 27.5% will be beneficial to eligible companies as it will mean that they pay less tax from the year ended 30 June 2018 onwards. In future years this rate will reduce eventually to 25%.
It gets complicated
One positive outcome of the legislation was that the lower tax rate can be used by companies that do not directly carry on a business but receive income from another entity that does, such as a trust. The rules here are complicated but generous, and we will assess eligibility when completing a company’s income tax return.
One disadvantage of the change in the tax rate is that it will also affect the franking credits attached to dividends that a company pays. Although a company may have previously paid tax at the rate of 30% on the profits required to pay a dividend, the franking credit may now be calculated at 27.5%. For example, if a company declared a dividend of $70,000 then the franking credit associated with this will now be $26,551 instead of $30,000. As with the company income tax rate, the applicable franking credit rate needs to be assessed on a year-by-year basis and careful planning will be required in some situations.
Please give us a call to discuss these changes and how they might apply to your business. They are complicated but certainly worthwhile if you are eligible.