ww-new-rules, Walker Wayland

Sep 2018 2 Minutes

New Rules on the Reduced Corporate Tax Rate

Legislation has recently been passed by Parliament that changes the rules for accessing the reduced corporate tax rate of 27.50% for the 2018 and subsequent tax years. Basically, a company must be a “base rate entity” to be eligible for the reduced corporate tax rate. Under the new rules, a company is a base rate entity if the following requirements are met:

  1. no more than 80% of the company's assessable income for that income year is “base rate entity passive income”; and
  2. the aggregated turnover of the corporate tax entity for the income year is less than the aggregated turnover threshold ($25 million in the 2017-18 income year; $50 million from the 2018-19 income year).

Base rate entity passive income basically refers to income earned from various investment activities, such as dividends (but not non-portfolio dividends, see below), franking credits, non-share dividends, interest, royalties, rent, a gain on a qualifying security, a net capital gain, a trust distribution or a partnership’s share of profit where the underlying trust’s or partnership’s income is also passive income.

A dividend is a non-portfolio dividend where the company shareholder has a 10% or more voting interest in another company that pays the dividend. Therefore, a dividend paid by a wholly owned subsidiary to its parent company is a non-portfolio dividend and will not be counted toward the 80% passive income test.

Importantly, under the new rules, companies are no longer required to be carrying on a business to be a base rate entity that accesses the lower corporate tax rate.  Therefore, it is the nature of the income the company derives and not the activities it undertakes that determines whether it can access the lower tax rate.

Where a company qualifies as a base rate entity, the maximum franking credit rate is generally the reduced rate of 27.50%. Therefore, this will have an impact on companies that declare or pay franked dividends during the income year. Depending on the circumstances, the shareholders may have to pay more top-up tax or receive less in tax refunds due to the reduced imputation credits attached to the dividends.

The new rules will apply from the 2017-18 income year. If you have any queries on the subject, Walker Wayland can help. Please contact our office on (08) 9364 9988 and ask to speak with Juanro.