Company Tax Rate Clarification


The Government has just announced that it will introduce legislation into Parliament to clarify confusion around the applicable tax rate for companies.

By way of background, in recent times the Government has passed legislation to progressively reduce the company tax rate for companies with a turnover of up to $50 million as follows:

 

Income year

 

Turnover threshold

Company tax rate for entities under the threshold

Company tax rate for entities over the threshold

 

2015–2016

$2m

28.5%

30.0%

2016–2017

$10m

27.5%

30.0%

2017–2018

$25m

27.5%

30.0%

2018–2019
to
2023–2024

$50m

27.5%

30.0%

2024–2025

$50m

27.0%

30.0%

2025–2026

$50m

26.0%

30.0%

2026–2027

$50m

25.0%

30.0%

 

It appears that the Government’s intention in making these reductions was to encourage small to medium businesses to reinvest the tax savings in their business, and in turn promote employment and investment growth.  

However, this intent became clouded recently when the ATO issued a draft Taxation Ruling in which it stated that, in its opinion, companies that were engaged in passive investments in shares and property could be seen to be carrying on a business, and thus eligible for the reduced company tax rate.

In response to this, the Government has stated that it will soon move to introduce legislation clarifying that only active trading companies qualify for the lower tax rate (and therefore not bucket companies or passive
investment companies).

Accordingly, if your company because of its turnover currently qualifies for the 27.5% tax rate and you are varying or otherwise calculating its PAYG Instalments, these should be calculated based on the reduced 27.5% tax rate only where the company is actively trading.

Bucket companies and companies that are solely engaged in passive investments in shares and property should operate (and calculate their PAYG Instalments) on the basis of the 30% rate applying; irrespective of the level of turnover.  

//www.ato.gov.au/Business/Small-business-entity-concessions/Concessions/Income-tax-concessions/Small-business-company-tax-rate/