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New Corporate Tax Rate Legislation from 2016/17
01 April 2017

New Corporate Tax Rate Legislation
from 2016/17

 

On 31 March 2017, an amended version of the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (see > link <) was passed by a majority of the Senate. Royal Assent has now been guaranteed by the Federal Treasurer on the basis that formal passage through the Coalition-majority House of Representatives will occur when Parliament resumes in early May 2017.

The finalised and amended Bill implements various tax changes proposed in the May 2016 Federal Budget (including Small Business Entity (SBE) concession changes such as the < $10 Million Aggregated Turnover increase from 1 July 2016 – see separate Tax Astute snapshot for a summary of these changes including calculation of aggregated turnover - > link <).  The finalised legislation also includes an amended version of previously announced measures to gradually reduce the corporate tax rate to 25% by 2026/27 for companies with < $50 Million aggregated turnover (see below).

The following timeline illustrates how the corporate tax rate reduces for eligible entities from 1 July 2015 onwards such that:

  • in 2015/16 (under pre-existing legislation) Small Business Entity (SBE) status resulted in a 28.5% corporate tax rate if the company’s current or prior year business aggregated turnover (defined in s 328-115 ITAA 1997) was < $2 Million, with a franking/imputation rate of 30% in all cases;
  • under the new legislation, in 2016/17 Small Business Entity (SBE) status results in a 27.5% corporate tax rate if the company’s current or prior year business aggregated turnover (defined in s 328-115 ITAA 1997) is < $10 Million, with the franking/imputation rate generally aligning with the company’s tax rate from 2016/17 onwards;
  • between 2017/18 and 2023/24 inclusive, Base Rate Entity (BRE) status will replace SBE status in order for a 27.5% corporate tax rate to apply. BRE status broadly requires a current year business and current year aggregated turnover to fall below the specified turnover thresholds (< $25 Million in 2017/18 and < $50 Million from 2018/19 - see below for further details); and
  • From 2024/25 further corporate tax rate reductions will occur as shown below, although the turnover threshold will remain at < $50 million aggregated turnover (defined in s 328-115 ITAA 1997).

SBEV 1A

Note that a non-business company (e.g. an investment company) will remain on a 30% tax rate for tax payable and imputation purposes because its lack of a current year business will not allow SBE nor BRE status to apply.

Note that a company’s tax rate for imputation/franking purposes will generally match its tax rate payable but may, in limited cases, vary from the tax rate payable for a particular year (e.g. where the prior year’s aggregated turnover is at or above the current year’s threshold but the current year’s aggregated turnover is below it).

In this document ‘company’ refers to any corporate tax entity.

Importantly, the above summary timeline treatment arises from a number of complex proposed legislative changes which impact taxation issues ranging from the imputation/franking of dividends through to specific issues such as tax consolidation allocable cost amount and loss transfer calculations.  Tax Astute clients will have access to all specific details in their forthcoming training session, with this summary providing an overview of:

  • how to identify Base Rate Entity (BRE) status which is essential to access a < 30% tax rate from 2017/18 onwards;
  • how to determine a company’s corporate tax rate for imputation/franking purposes (in limited cases this may be different rate to the tax rate paid); and
  • an overview of proposed corporate tax rates and franking calculations in forthcoming years.

 

Summary Corporate Tax Rate Issues from 2016/17 onwards

 

The following table summarises how the corporate tax rate is proposed to apply from 2016/17, including calculations of likely after-tax income and maximum franking credit amounts.

 

PROPOSED CORPORATE TAX RATE CHANGES FROM 2016/17

A

B

C

D

E

F

G

Income Year

Required Status

Required Company Aggregated Turnover threshold for lower rate

Lower Company Tax Rate (%)

Net after-tax income
(if taxable income = $100K)

S 202-60 ITAA 1997 Gross Up Rate calculation used to calculate
MAXIMUM FRANKING CREDIT
(Notes 1 and 2)

Maximum Franking Credit on net after-tax income
(E x F)
(Note 3)

2016/17

SBE

< $10 Million

27.5%

$72,500

Per corporate tax rate for imputation - generally

1
------
2.64

$27,500

 

 

2017/18

BRE

< $25 Million

2018/19 to 2023/24 inclusive

 < $50 Million

 

 

 

2024/25

27%

$73,000

Per corporate tax rate at D

1
------
2.70

$27,000

 

 

2025/26

26%

$74,000

Per corporate tax rate at D

1
------
2.85

$26,000

 

2026/27 onwards

25%

$75,000

Per corporate tax rate at D

1
------
3

$25,000

 

Note 1 – the denominator figure in the calculations shown at column F represents the ‘corporate tax gross-up rate’ which is broadly calculated as (100% - corporate tax rate for imputation purposes for year)/corporate tax rate for imputation purposes for year).

Note 2 – The ‘corporate tax rate for imputation purposes’ will generally align with the tax rate payable for the year (e.g. 27.5% for most SBE’s in 2016/17) as noted in Column F. In rare cases, however, where the corporate tax rate for imputation purposes varies from the tax rate payable (e.g. where prior year aggregated turnover is at or > the current year’s threshold but current year aggregated turnover is below it) the rate used for the column F gross-up rate calculation may be 30% resulting in a 1 / 2.33 gross-up instead of the amounts shown.  This will also remain the imputation gross-up calculation for 30% corporate tax entities which do not meet the required SBE or BRE status for the year (e.g. non-business/investment entities or those with aggregated turnover above the relevant threshold).

Note 3 – Column G (in combination with column F) illustrates the general principle that as the corporate tax rate reduces, the rate at which dividends may be franked will correspondingly reduce.  There is, however, no specific opening franking account adjustment required as a company’s tax rate reduces.

 

 

 
 
 

WANT MORE DETAILS?

(Contact Tax Astute)

In addition to details available at www.taxastute.com.au, Tax Astute clients receive more information and specific details, questions and answers underlying the brief snapshot summary above as a part of their:

  • Tax Astute Training Session;
  • Tax Astute Final Reference Notes; and
  • Tax Astute Detailed Multimedia Recording.

 

 

COPYRIGHT & DISCLAIMER STATEMENT

©Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 2017

This training material snapshot summary is subject to copyright and may not be reproduced, reused or adapted in any manner, except in accordance with the Copyright Act 1968 (Cth) for bona fide study purposes, other than with the express written consent of Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust).

This material has been prepared with the objective of maximising accuracy and currency, but is provided for personal educational purposes only and must not be relied on as legal, financial or any other type of advice.  Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) hereby excludes any and all liability arising, whether directly or indirectly, from the use of this training material snapshot summary and any information contained herein.

 

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