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Deciphering Australia’s two company tax rates

Deciphering Australia’s two company tax rates

With the government’s plan to cut the corporate tax rate now in tatters, many business leaders have been left confused about the actual rate of tax they are paying: a situation the ATO is attempting to address.

In an update on its website, the Tax Office outlined that at present there are two company tax rates for Australian businesses.

The full rate remains at 30 per cent, while the “lower company tax rate” is currently pegged at 27.5 per cent.

Eligibility for the lower rate, the ATO explained, depends on two core factors – whether the business was deemed to be a small business entity in both the 2016 and 2017 financial years, or whether it was a base rate entity for the 2018 financial year.

What is a base rate entity?

According to the ATO, a base rate entity is a company that is carrying on a business (i.e. trading) and also has an aggregated turnover less than the aggregated turnover threshold of $25 million in 2017-18.

“From the 2017–18 income year, companies that are base rate entities must apply the lower 27.5 per cent company tax rate,” its website states.

In other words, this measure will be the one that defines eligibility to the lower tax rate from now on.

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What is a small business entity?

A small business entity is defined as a business that has aggregated turnover below $10 million and is trading for at least part of the financial year.

This was the measure used to determine eligibility for the lower company tax rate of 27.5 per cent in 2016-17, and that of 28.5 per cent in the 2015-16 financial year, but has now been phased out in favour of the base rate entity model.

How will the tax rate change in the next few years?

While there was a push by the government to standardise the tax rate at a lower level for businesses of all size, this was recently squashed by the Senate. And with the change of prime minister and an election due next year, it is uncertain as to how the tax rate may actually change in the years ahead.

Putting that aside, there are a number of changes already legislated to occur over the next decade.

The lower tax rate will remain where it is, at 27.5 per cent, until 2024-25. At that point, it will drop by 0.5 per cent to 27 per cent, and then fall by a further 1 per cent for each of the next two financial years. That staged reduction will take the company tax rate to 25 per cent by the 2027 financial year.

What will change immediately is the number of SMEs entitled to claim the lower tax rate.

In the current financial year, the aggregated turnover threshold will double to $50 million, allowing many business locked out from tax cuts in previous years to enjoy a lower tax rate from now on.

Unlike the phased tax cuts, this increase in eligibility is a one-off.

More information on the current and future company tax rate, as well as proposed changes, can be found on the ATO website.

Deciphering Australia’s two company tax rates
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