Small Business Company Tax Rate Decrease - What it means to Companies and Shareholders

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May 9, 2017 | Posted in Tax
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The corporate tax rate for a small business has been decreased from 30% to 28.5% for the 2015-2016 financial year and decreased further to 27.5% for the 2016-2017 and following years. Small Business companies are businesses that have an aggregated turnover of:
  • less than $2 million for the 2015-2016 financial year
  • less than $10 million for the 2016-2017 financial year
  • less than $25 million for the 2017-2018 financial year.
For companies that do not meet the threshold tests in the Small Business Entity rules, the rate will remain 30%.

From the 2016-2017 income year the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 also changes the method of calculating maximum franking credits that can be allocated to a frankable distribution, generally a dividend, paid by a company. Previously, companies had a maximum franking credit of 30% due to the definitions provided in the Income Tax Assessment Act 1997 for the standard corporate tax rate. The new legislation has replaced the phrase ‘standard corporate tax rate’ with the phrase the entity’s ‘corporate tax rate for imputation purposes’ for the income year in which the distribution is made. The corporate tax rate for imputation purposes for the current income year will be based on the prior year’s income. 

For example if a company has a $15 million turnover in the 2016-2017 income year the entity would not be a small business as it is over the $10 million dollar threshold for 2016-2017. If, in the 2017-2018 income year turnover increased to $28 million, the company would still not be a small business entity as the threshold in that year is $25 million and therefore the corporate tax rate will be 30% in both years. However the corporate tax rate for imputation purposes in the 2017-2018 income year relates to the turnover from the 2016-2017 income year which was $15 million. As the $15 million is below the $25 million threshold in the 2017-2018 income year the maximum franking credit amount is 27.5% whereas the company is paying 30% income tax. From 2018-2019 the maximum corporate tax rate for imputation purposes will be 27.5% for those businesses turning over less than $50M.

Please note the turnover growth depicted in the below examples are purely to highlight the operation of the new law.



















For companies that have paid 30% corporate tax rate and then in later years fall under a small business entity threshold reducing the corporate tax rate to 27.5%, the maximum franking credit that can be distributed will be 27.5%. The reality of this is that franking credits will be trapped in the franking account of the corporate tax entity when that entity has previously paid tax at 30%.

With the decreased franking credits individuals will pay higher amounts of income tax (or ‘top-up’ tax) on dividends received. 

Below is an example of the outcome for an individual shareholder taxed at the top marginal rate of 49% on the additional dividend income.










This example results in additional tax of $1,758.62 at the individual shareholder level on the dividends paid by the small business entity with the lower corporate tax rate for imputation purposes of 27.5%. This additional tax would have previously been paid at the company level but also passed on via franking credits.

So while the tax cuts may provide additional cash for trading companies to enhance returns to shareholders the corresponding decrease in the franking credits makes this a negligible benefit in the hands of Australian resident shareholders.

Sources: Legislation and EM - accessed 5 May 2017.
DarylCorpe
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