The Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018 was passed into Law on 23 August 2018 and received Royal Assent on 31 August 2018.

This legislation brings in changes to company tax rates and by consequence, changes to the franking rate for dividends. These changes have been backdated to apply from 1 July 2017.

Company Tax Rates for the Financial Year ended 30 June 2018 and going forward
The full company tax rate is 30% and applies to all companies who are not base rate entities. Companies classified as base rate entities use the lower company tax rate of 27.5%.

To properly understand these changes we need the following two definitions:

Base Rate Entity:
A company that has both:
• 1. An aggregated turnover below the relevant aggregated turnover threshold – this is $25 million for the Financial Year ended 30 June 2018, but will increase to $50 million for the Financial Year ended 30 June 2019 and onwards
  2. No more than 80% of it’s assessable income is from base rate passive income.

Base Rate Passive Income:
Includes all income from the following sources: corporate distributions (and related franking credits on the distributions), gains from qualifying securities, interest income, a net capital gain, rent and royalties. Some exceptions apply to interest income and corporate distributions. Also to a certain extent, amounts that are included in the assessable income of a partner in a partnership, or a beneficiary of a trust, are also considered part of base rate passive income.

Now we can better understand who is going to be eligible for the lower company tax rate. Although the $25 million turnover threshold for the Financial Year ended 30 June 2018 is great for many companies, others will find themselves moving to the full company tax rate because of the requirement for no more than 80% of income to be base rate passive income.

Franking rates for the Financial Year ended 30 June 2018 and going forward
The corporate tax rate for imputation purposes is 30%, unless your company meets either of the following criteria:

• 1. It didn’t exist in the previous income year
  2. It’s aggregated turnover in the previous income year was under $25 million and 80% or less of it’s assessable income was base rate entity passive income.

By meeting either of these criteria the corporate tax rate for imputation purposes is reduced to 27.5%.

You may need to update your distribution statements
As these changes have only been legalised after their effective date, some companies will need to issue revised distribution statements to shareholders as these would have been prepared based on legislation that has now changed. We will advise our clients if this is the case for them and what is required as a result.

If you have any questions about how these updates to the corporate tax and franking rates affect your business, please call us on 03 5339 3200 or contact us here.

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