New concessional tax arrangements for companies running small businesses
As foreshadowed in the 2017/18 budget, and effective as of 1 July 2018, the Federal Government has introduced a new concessional corporate tax rate of 27.5% for companies carrying on small businesses provided certain eligibility criteria are met. These new concessional rates apply to companies carrying on businesses which are either 'Base Rate Entities' or 'Small Business Entities'.
A Base Rate Entity is a company that:
- carried on a business; and
- had an aggregate annual turnover of less than $25 million for the 2017-18 income year.
A Small Business Entity is a company that:
- carried on a business; and
- had an aggregate annual turnover of less than $10 million from the 2015-16 and income year 2016-17.
Under transitional arrangements for income years 2015-16 and 2016-17, a reduced company tax rate of 28.5% was available to small business entities with an aggregated turnover less than $2 million. However, from the 2017-18 income year onward, the concessional tax rate will only be available to Base Rate Entities.
Additionally, commencing in 2018-19 the aggregated turnover threshold for Base Rate Entities will be increased to $50 million.
Further changes to the corporate tax rate
As well as increasing the turnover threshold for small businesses, the Federal Government has legislated further reductions to the corporate tax rate for Base Rate Entities in future income years. By 2026-27 the concessional tax rate for Base Rate Entities will be 25%, although it should be noted that the ability of the Federal Government to guarantee these changes remains to be seen in the context of the Federal Election due some time before May 2019.
Consequences and Recommendations
Small businesses who meet the above concessional threshold should consider running their business through a company in order to access the reduced company tax rate and maximise effective tax outcomes. Cleardocs offers a range of products relating to incorporation and maintenance of companies which can be used to do this.
You can find these Cleardocs packages here: Company Registration.
Can a Bucket Company access the reduced corporate tax rate?
A bucket company - a company that is a beneficiary under a discretionary trust and which receives distributions from the discretionary trust - cannot access the reduced corporate tax rate.
This is because the bucket company simply receives income via distributions from the trustee of the trust: it does not matter if the discretionary trust itself carries on a business. Accordingly, if the bucket company is not itself operating a business, then the criteria for accessing the reduced corporate tax rate are not met.
More information from Maddocks
For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Tax and Revenue or General Commercial teams.
You can also read earlier ClearLaw articles on a range of tax topics.