Base Rate Entity - Corporate Tax Rates

The corporate tax rate for Small Business Entity (SBE) companies was reduced to 27.5% from the 2017 financial year. To be an SBE, a company must have carried on a business in the current year and met a $10 million aggregated turnover threshold cap.

However, as the aggregated turnover for eligibility for the 27.5% corporate tax rate increased to $25 million, the Federal Government decided to move away from this SBE concept and move to a ‘Base Rate Entity’ concept.

What is a Base Rate Entity?

The concept of Base Rate Entity has now been enacted in Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act 2018.

Under the Act, an entity is a Base Rate Entity for a year of income if:

• No more than 80% of its assessable income for the year of income is base rate entity passive income; and

• Its aggregated turnover for the year of income, worked out as at the end of the year, is less than $25 million.

What is Base Rate Entity Passive Income?

• Base Rate Entity Passive income is assessable income that is any of the following:

• Company dividend, other than a non-portfolio dividend

• Franking credits

• Non-share dividend

• Interest, royalties and rent

• Gain from a qualifying security

• Net capital gain

• Income from a partnership or trust estate that is base rate passive income

Some Issues Around This Definition

A non-portfolio dividend is a dividend paid to a company where that company has a voting interest amounting to at least 10% of the voting power in the company paying that dividend. Consequently, dividends derived by a holding company which are made by a wholly owned subsidiary company are not base rate entity passive income of the holding company.

‘Rent’ is not defined in the Act and should take its ordinary legal meaning. However, rent, by its nature will be classified as base rate entity passive income, even if it is derived from the carrying on of a business. There is no carve-out for companies that derive rental income in the course of carrying on a business of renting properties.

Where an amount is included in the assessable income of a partner in a partnership or of a beneficiary of a trust, the amount retains the character it had in the hands of the partnership or trust. This would then require tracing back through the partnership or trust to determine the ultimate nature of the income.

For example, if a company is a beneficiary of a discretionary trust and the trust only derives rent, and the trustee determines to distribute 50% of the income of the trust to a company, the distribution would be base rate entity passive income in the company’s hands.

Similarly, if the only income of a discretionary trust was from the carrying on of a trading business, an amount distributed to a company would not be base rate entity passive income.

Capital gains and franked dividends are the only base rate entity passive income that a trust can stream, provided the trust deed allows it. Therefore, if a trust has both base rate entity passive income and trading income, it will be necessary to apportion the expenses of the trust to determine the correct amount of base rate entity passive income that is included in the beneficiary’s assessable income.

Has the maximum franking rate of dividends changed?

The maximum franking rate of dividends for the 2018 financial year will be 27.5% if either:

The aggregated turnover in the 2017 financial year was less than $25 million and 80% or less of the company’s assessable income was base rate entity passive income; or

The company didn’t exist in the 2017 financial year.

If none of the above is satisfied, the company’s maximum franking rate of dividends will be 30%.

If you are in any doubt as to how the tax rates or franking rates apply to your company, please contact our office on (07) 5504 5700 to speak to one of our trusted advisors.

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