Australia: Changes to Company Tax Rate for Small Businesses

Legislation has changed the requirements for the concessional company tax rate in Australia: what should small business employers know?

In 2018, Australian legislation adjusted the requirements which qualify small businesses for the country’s reduced corporate tax rate. While Australia’s standard corporate tax rate is 30%, those qualifying small businesses (known as ‘base rate entities’) now pay only 27.5%. The move is intended to help small-to-medium sized businesses bring on more employees and invest for the future.

First introduced in 2016, the Treasury Laws Amendment (Enterprise Tax Plan) received Royal Assent in 2017 and initially came into effect for the 2017-2018 tax year to adjust the tax environment for small businesses across Australia. The shift in the tax regime is part of the ongoing effort by Australia's government to lower the corporate tax rate and is scheduled to introduce further changes over the coming years.

Scheduled Tax Rate Changes

Prior to 2017-2018, the base rate entity threshold stood at AUD$10 million. In 2017-2018 however, that threshold changed. Under the new legislation, businesses would qualify if:

  • Their aggregate turnover was less than $25 million for the 2017-2018 income year,

And,

  • 80% of their assessable income could be classified as passive (replacing the need the entity to be “carrying on a business”).

The changes to Australia’s company tax rate will continue to change in 2019 and beyond. The changes have been plotted as follows:

Income Year

Base Rate Turnover Threshold

Base Rate Entities Company Tax Rate

Standard Company Tax Rate

2015 - 2016

$2 million

28.5%

30%

2016 - 2017

$10 million

27.5%

30%

2017 - 2018

$25 million

27.5%

30%

2018 - 2019

$50 million

27.5%

30%

2019 - 2020

$50 million

26%

30%

2021 - 2022

$50 million

25%

30%

 

Small businesses should obviously pay attention to the qualifying turnover threshold to determine their status as a base rate entity. Non-base rate entities will continue to pay corporate tax at the 30% rate.

Aggregated Turnover: In this instance, ‘aggregated turnover’ refers to the turnover of both a business and that of any entities affiliated with it. Those affiliated businesses do not have to be based in Australia.

Passive Income: Similarly, ‘passive income’ refers to a range of possible business incomes, including:

  • Accumulated royalties and rent
  • Corporate distributions and franking credits
  • Interest
  • Net capital gains and securities gains
  • Incomes attributable to partner businesses

Franking Credits: The tax changes also affect the rates for businesses using franking credits for shareholder dividends. In this context, the maximum franking credit should be based on the applicable corporate tax rate for imputation purposes (Australia’s dividend imputation system is designed to prevent double taxation of shareholder dividends).

Tax Rates and Future Economic Growth

The Australian government has joined a global trend to cut corporate tax rates to stimulate economic growth. Estimates by the Treasury suggest that the adjusted tax rate will cost the Commonwealth Budget around $2.7 billion up to the 2020 income year, and up to $48.2 billion up to 2027 - a cost which comes at a time when the government is running a structural deficit and many politicians are arguing for a return to surplus.

The Australian government, meanwhile, has pointed out that Australia’s corporate tax is high compared to other developed countries. It has argued that the competitiveness of the corporate tax rate is key to raising productivity, investment levels, and the GDP - and in turn, wages and living standards. Comparable economies include Luxembourg, which had rate of 26.08% in 2018, and Spain which had a rate of 25% in 2016. The United Kingdom meanwhile has declared a rate of 17% corporate tax for 2020. Australia’s efforts to progressively reduce its corporate tax predict a 25% rate by 2026-2027.

Find out more about Australia’s income tax and corporate tax landscape with activpayroll’s dedicated Australia Global Insight Guide.