After significant discussion and varied interpretation around the application of the lower company tax rate, clarity has been gained with legislation being passed outlining which companies can get access to the lower tax.
The introduction of the lower tax rate is part of the Government’s enterprise tax plan that will see the company tax rate gradually reduce from 30% to 25% by 2026-27.
The lower tax rate of 27.5% is available to companies that are defined as base rate entities in the 2018 financial year.
This is different to the eligibility for the lower tax rate in prior years which was limited to companies that were small business entities, meaning a company that carried on a business and had aggregated business turnover of less than $10 million (2017) and $2 million (2016).
In general terms, the current legislation defines a base rate entity to be a company that has aggregated turnover of less than $25 million and no more than 80% of the income can be passive income.
From a taxpayer’s perspective, the move from the small business entity eligibility criteria will provide greater opportunity for companies to access the lower rate in the 2018 financial year.
Another change that this legislation has introduced is clarity regarding the franking credits payable by a company on dividends declared. Under the new rules, a company must frank a dividend equal to the company tax rate it was subject to in the previous financial year.
What this means for companies accessing the lower tax rate in the 2018 year is that they can continue to frank their dividends to 30 cents in the dollar if declared during the 2018 year. This is a positive outcome given the old rules limited the franking amount to the current year tax rate, limiting the ability to access tax paid at the higher rate in prior years.
For assistance in administering the taxation requirements for your company or to find out more information on this topic, speak with your Davidsons team member or phone the office on 03 52216399.