With a speed not usually seen with tax legislation, the Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018 was introduced into parliament on the 16th October and passed both houses on the 18th October. The Governor-General gave his royal assent on the 25th October.
Companies that meet the below criteria will have a tax rate of 26% in 2020-2021 and 25% in 2021-2022. To be eligible for the lower tax rates the companies need to;
- Have an aggregated turnover of less than $50 million; and
- Pass the base rate entity passive income test (BREPI) by having no more that 80% of their assessable income as passive income
For a more detailed explanation of the base rate entity passive income test please refer to our previous blog - Access to the lower Corporate tax rate: The new 'Passive Income Test'.
This brings forward the 25% tax rate that wasn’t planned to start until the 2026/2027 years. The new rate changes are illustrated below;
| Financial Year |
Pass the BREPI Test and have an aggregated turnover less than |
Current company tax rate |
New company tax rate |
| 2017 - 18 |
$25 million |
27.5% |
27.5% |
| 2018 - 19 |
$50 million |
| 2019 - 20 |
$50 million |
| 2020 - 21 |
$50 million |
26% |
| 2021 - 22 |
$50 million |
25% |
| 2022 - 23 |
$50 million |
| 2023 - 24 |
$50 million |
| 2024 - 25 |
$50 million |
27% |
| 2025 - 26 |
$50 million |
26% |
| 2026 - 27 |
$50 million |
25% |
The new laws also increase the small business income tax offset which is currently at 8% of an individual’s basic income tax liability. The discount will apply to individuals with business income from an unincorporated business whose aggregated annual turnover is less than $5 million. This offset will continued to be capped at $1,000. The new rate changes are illustrated below;
| Financial Year |
Current tax offset |
New tax offset |
| 2017 - 18 |
8% |
8% |
| 2018 - 19 |
| 2019 - 20 |
| 2020 - 21 |
13% |
| 2021 - 22 |
16% |
| 2022 - 23 |
| 2023 - 24 |
| 2024 - 25 |
10% |
| 2025 - 26 |
13% |
| 2026 - 27 onwards |
16% |
While many people find company tax rate cuts exciting news, it is also a double edged sword. It must also be remembered that while a lower tax rate is being paid by the company, the individuals will still have to pay ‘top up’ tax when the dividends are paid out.
There could also be increased tax planning impacts for those businesses who were planning on using as much of their franking credits as possible before the lower rates came into effect.
More detail on the effect on shareholders has been previously discussed when the tax rates were first decreased (Small Business Company Tax Rate Decrease - What it means to Companies and Shareholders).
If you wish to discuss any of these changes please contact your Ulton adviser to discuss your concerns or needs.
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