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Tax Alert: Reducing company tax rates

As announced in previous Federal Budgets, the government aims to progressively reduce business tax rates for companies over several years

Contingent on the size of the taxpayer, the change in rate for some companies will take place in 2017. For small corporate tax entities the tax rate will be reduced to 27.5 per cent.

While the government intended for the tax rate changes to be crystal clear, there was some ambiguity in the legislation … as can be the case with tax law! In particular, whether the reduction could extend to companies deriving passive income only. It is understood that the Treasurer is willing to provide legislative assistance to the Australian Tax Office (ATO) to help clarify the issue.

Originally a corporate tax entity qualifed for the lower rate for an income year if they were to satisfy:

  1. The aggregated turnover test
  2. Carried on a business

The turnover test varies on the financial year of the application as follows:

  • Financial year 2017 Aggregated company turnover Less than $10 million
  • Financial year 2018 Aggregated company turnover Less than $25 million
  • Financial year 2019 Aggregated company turnover Less than $50 million

Last week Treasury released exposure draft legislation attempting to clarify the intended application of the reduced tax rates - in doing so one additional criterion was included. The new criterion now states a corporate tax entity must pass the following tests:

  1. The aggregated turnover test
  2. Carried on a business AND
  3. Passive income does not account for 80 per cent or more of assessable income for the tax year

Passive income has been defined to include:

  • A distribution made by a corporate tax entity other than a non-portfolio dividend
  • A non-share dividend
  • Interest income
  • Royalties
  • Rent
  • Some gains on securities
  • Partnership or trust income to the extent that partnership or trust income is attributable to the above sources

The intention of the new test is to generally eliminate the accessibility of reduced corporate tax rates for entities with primarily passive income. This may include companies receiving:

  • Dividends and interest on shares and other investments
  • Rental income from investment properties held
  • Distributions as a corporate beneficiary in some circumstances

Consultation regarding this exposure draft closes this week … in the meantime, if you have any queries please do not hesitate to contact your Fordham Partner.

Download: Tax Alert-Reducing company tax rates-September 2017

This publication has been prepared by Fordham Business Advisors Pty Ltd (Fordham) and Perpetual Trustee Company Limited ABN 42 000 001 007, AFSL 236643 (PTCo). Fordham is part of the Perpetual Limited Group. Perpetual Private advice and services are provided by PTCo. This information, including any assumptions and conclusions, is not intended to be a comprehensive statement of relevant practice or law that is often complex and can change. It is believed to be accurate at the time of compilation and is provided in good faith. However, it contains general information only and is not intended to provide you with advice or take into account your personal objectives, financial situation or needs. You should consider whether the information is suitable for your circumstances and we recommend that you seek professional advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.