From 1 July 2022, the company tax rate for a base rate entity fell to 25%, down from 26% in the previous financial year (FY2021). This marks a significant reduction from the standard tax rate of 30% that applies to most Australian companies. For example, if your company is making a $40,000 net profit, a 5% tax saving amounts to $2,000—a considerable benefit for small businesses.
But not every company is a base rate entity. So, who qualifies for this lower tax rate?
To be eligible as a base rate entity, all the following criteria must apply:
- Your company’s aggregated turnover in the previous income year must be less than $50 million, and
- 80% or less of your assessable income must be base rate entity passive income.
Passive income includes:
- Corporate distributions (such as portfolio dividends) and their franking credits
- Rental income, royalties, and interest income
- Net capital gains
- Gains on qualifying securities
Suppose a business earns more than 80% of its income from passive sources, such as rental income or interest income. In that case, it will not qualify for the lower company tax rate—even if the annual turnover is under $50 million. In this case, the standard tax rate of 30% will apply.
Implications for Different Business Structures
It’s also important to understand how tax applies across various entities:
- A partner in a partnership is taxed differently from a company. The partnership itself doesn’t pay income tax; instead, the individual partners declare their share of income (including any interest income or rental income) on their tax returns.
- A beneficiary of a trust is similarly taxed on their share of the trust’s net income.
- Companies carrying on a business with lower turnover and limited passive income may qualify as base rate entities and enjoy the 25% tax rate.
Whether you’re a sole trader, partner in a partnership, or a director of a private company, understanding your eligibility for tax concessions is essential. If your company’s aggregated turnover is nearing the $50 million threshold or you derive a significant amount of portfolio dividend or interest income, the impact on your tax rate could be significant.
Get Reliable Help from Tax Experts
Need help working out your eligibility? Our team of trusted CPA accountants in Inner West Sydney (Ashfield), Belrose (Northern Beaches), and Adelaide can assist. Whether you’re assessing your company’s status as a base rate entity, managing rental income, or understanding the implications of being a beneficiary of a trust, we offer tailored advice to help you navigate Australia’s corporate tax framework. Ashfield, Belrose, Northern Beaches, and Adelaide: Get Informed about your company’s tax rates
