New rules for accessing the 27.5% company tax rate from 1 July 2017

The Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 was introduced into the House of Representatives on 18 October 2017.

This Bill amends the Income Tax Rates Act 1986 (Cth) (Rates Act) to ensure that, from the 2017-18 income year, a company will qualify for the lower company tax rate for an income year if:

  • no more than 80% of the company’s assessable income for that income year is ‘base rate entity passive income’; and
  • the company’s aggregated turnover for the income year is less than the aggregated turnover threshold for that income year (for the 2017-18 income year, the threshold is less than $25 million).

These amendments will modify the requirements that must be satisfied for a company to qualify as a ‘base rate entity’ by replacing the ‘carrying on a business’ test with a passive income test. Under the passive income test, companies that are generating predominantly passive income (eg rent, royalties etc) will not be eligible for the lower company tax rate.

The purpose of this legislation is to ensure that passive investment companies cannot access the lower company tax rate that is otherwise available to small businesses.

Currently, to qualify as a ‘base rate entity’ in order to apply the lower company tax rate, a company must be ‘carrying on a business’ as well as meet the relevant aggregated turnover threshold.

The Bill will apply prospectively from the 2017-18 income year.

An amount of assessable income is ‘base rate entity passive income’ includes items such as:

  • a distribution that is not a ‘non-portfolio dividend’;
  • franking credits attached to such a distribution;
  • interest income (as defined in the income tax legislation);
  • a royalty;
  • rent; and
  • a net capital gain.