Parliament managed to agree at the end of last year to lower small business company tax rates.
The standard company tax rate is still 30% but the rate for small companies has decreased to 27.5 % for the 2017/18 and 2018/19 years and then falls to 27% for 2019/20, 26% for 2020/21 and 25% for 2021/22. This compares to the top individual rate of 47% or zero if you have super in pension phase.
Yes you guessed correctly there are a lot more rules and conditions for getting the lower rate.
There is now the concept of the BASE RATE ENTITY. This applies for companies with “aggregated turnover” less than $25 million for the 2017/18 year and less than $50 million for the 2018/19 year. Beware that the words aggregated and turnover have special meanings. Also rather than just carrying on a business the company must have not more than 80% of its taxable income being “base rate passive income”. Passive income is now specified as dividends, interest, rent and royalties and net capital gain. The definitions of “affiliate” and “connected with” add to the complexity.
Companies can move from 27.5% to 30% and back again from one year to another.
Once you pay this tax at whatever rate, your franking account is then increased accordingly so that if you pay out a dividend then it has to be franked but at what rate? This is based on the tax rate on which the company paid tax on the year before the dividend was paid. Thus in a year the franking rate could be different to the taxable rate.
Lots of scope for errors. It’s our job to get this correct for you.