From Wednesday, the small business tax rate will be reduced from 27.5 per cent to 26 per cent for businesses with a turnover of less than $50 million, before dropping further to 25 per cent from the 2021–22 income year.
Established while Malcolm Turnbull was still prime minister, the government’s original tax cut plan was supposed to drop the corporate tax rate for SMEs with annual turnovers of up to $50 million from 30 per cent to 25 per cent over a 10-year period, with the first drop to 27.5 per cent coming into effect on 1 July 2018, and reducing gradually to 25 per cent by 2026–27.
However, after the industry had lobbied for the government to bring forward the enterprise tax cut, the Morrison government announced in 2018, as part of the election pitch, that it would introduce legislation to bring the tax rate down to 25 per cent for businesses with an annual turnover below $50 million — five years earlier than the former plan.
The full company tax rate of 30 per cent applies to all companies that are not eligible for the lower company tax rate.
In a statement accompanying the tax rate cut in 2018, Prime Minister Scott Morrison and Treasurer Josh Frydenberg said the change “will help to ensure Australian businesses are competitive to protect our economy and jobs”.
“This means that a small business, such as an independent supermarket or a pub, that makes $500,000 profit will have an additional $7,500 in 2020–21 and $12,500 in 2021–22 to invest back into the business or staff, or help to manage cash flow,” the government said at the time.
The ATO sets out the eligibility criteria for the lower corporate tax rate, noting that a corporate tax entity will be taxed at the lower rate if it is a base rate entity.
In further clarification, the ATO explains that a corporate entity will be a base rate entity if:
- No more than 80 per cent of its assessable income is base rate entity passive income (such as interest, dividends, rent, royalties and net capital gain).
- Its aggregated turnover is less than the relevant threshold ($25 million in the 2017–18 income year; $50 million from the 2018–19 income year).
Given the recent coronavirus-induced pressures, the government is expected to do more to help hundreds of thousands of businesses recover.