Changes to the lower corporate tax rate for the 2018 income year and onwards
Requirements for companies to meet the eligibility for the lower SBE (Small Business Entity) corporate tax rate of 27.5% for the 2018 financial year now require companies to meet a new Base Rate Entity test.
In the 2017 financial year corporate entities were required to be classified as an SBE with an aggregated turnover of less than $10 million that were carrying on a business for all or part of the year, in order to access the lower tax rate. In the 2018 financial year and onwards companies will be required to be classified as a Base Rate Entity that meets the passive income test and has aggregated turnover of less than $25 million. This test replaces the requirement for SBE’s to be carrying on a business.
The passive income test now requires entities to have no more than 80% passive income for the financial year.
Passive income is made up of the following:
dividends and franking credits
royalties and rent
interest income (some exceptions apply)
gains on qualifying securities
a net capital gain
an amount included in the assessable income of a partner in a partnership or a beneficiary of a trust, to the extent it is traceable (either directly or indirectly) to an amount that is otherwise base rate entity passive income.
The corporate tax rate for base rate entities will remain at 27.5% from the 2019 financial year until 2024. From 2025 it will then be further reduced to 27%. The aggregated turnover threshold required in 2019 will increase from $25 million to $50 million, where it will remain at this threshold.
With the reduction of the corporate tax rate comes confusion surrounding what corporate tax rate is to be used for imputation credits on franked distributions.
From the 2018 income year, to work out the corporate tax rate for franking your distributions, you need to assume your aggregated turnover, assessable income, and base rate entity passive income will be the same as the previous income year. For 2018 your corporate tax rate for imputation purposes will be 27.5% if your aggregated turnover in the prior year was less than the current year aggregate turnover threshold, being $25 million for 2018 and 80% or less of your assessable income was base rate entity passive income.
If you do not meet these requirements, then distributions must be franked at the higher 30% corporate tax rate for imputation purposes.
If you issued distributions using the incorrect corporate tax rate for imputation purposes, you should tell your shareholders the correct dividend and franking credit amounts as soon as possible. This can be done in a letter, email or by issuing an amended distribution statement.