Company tax cuts pass the Senate with amendments
Editor: After a marathon few days of extended sittings (the last before the Federal Budget in May), the Government finally managed to get its company tax cuts through the Senate, but it was not without compromise.
The final changes to the law, as passed by the Senate, including a recap of which of the original proposals remained intact and also which ones were changed are covered under three headings:
- Increase to the SBE turnover threshold
- Reduction in the corporate tax rate
- Changes to the franking of dividends
Increase to the SBE turnover threshold
As was previously announced, the Small Business Entity (‘SBE’) definition has changed with respect to the turnover eligibility requirement. The aggregated turnover threshold has increased from $2 million to $10 million with effect from 1 July 2016 (i.e., the current, 2017, income year).
Note that, whilst the increase in this threshold will expand access to most SBE concessions (e.g., simplified depreciation), this change will not apply with respect to:
- the Small Business Income Tax Offset (a special $5 million threshold will apply when determining eligibility for this tax offset); and
- the Small Business CGT concessions (the aggregated turnover threshold to access these concessions will remain at $2 million, although taxpayers may still seek to satisfy the $6 million maximum net assets test as an alternative method of obtaining access to these concessions).
Reduction in the corporate tax rate
The most significant difference between the Government’s original proposals and what was finally passed by Parliament was in relation to the reduction in the corporate tax rate.
Although the corporate tax rate will still decrease to 25% (by the 2027 income year, as originally proposed), access to the reduced corporate tax rate will be restricted to corporate entities that carry on business with an aggregated turnover of less than $50 million (from the 2019 income year).
The following table provides a summary of how the progressive reduction in the corporate tax rate will apply.
|Income Year||Aggregated Turnover||Company Tax Rate|
|2016||< $2 m||28.5%|
|2027 ff||< $50m||25.0%|
Editor: As noted above, corporate entities with at least $50 million aggregated turnover or, more importantly, companies that do not carry on business (e.g., passive investment companies and ‘bucket companies’) will continue to have a corporate tax rate of 30%.
Changes to the franking of dividends
Prior to this income year, companies that paid tax on their taxable income at 28.5% could still pass on franking credits to their shareholders at a rate of 30%, subject to there being available franking credits.
However, with effect from 1 July 2016 (i.e., this income year), the maximum franking credit that can be allocated to a frankable distribution paid by a company will be based on the tax rate that is applicable to the company.
Editor: Please contact this office if you would like to know how these changes will affect your business specifically.