RSM Australia

How much tax will you pay on your profits?

It’s estimated a million small and medium-sized businesses were given some tax relief last financial year and from July 1 this year are benefiting from an additional tax cut. Are you one of them and taking advantage of it?

How the tax cuts works

The usual company tax rate is 30%. The small business tax rate of 28.5% is only applicable to companies that are a small business entity for the 2015-16 financial year. This rate decreased again recently falling to 27.5 per cent as of July 1 this year.

Do you fit the definition of “small”?

Your company is defined as a small business entity only if it:

  • Operated a business for all or part of the income year; and
  • Has less than $2 million in aggregated turnover (i.e. including annual turnover of associated or affiliated businesses)
  • If your company is not carrying on a business (e.g. an investment company) the 30% tax rate still applies regardless of its turnover.

The dividends you pay – what DO the new rates mean?

When you pay a dividend, the shareholders (usually you and your business partners or your family) get a credit for the tax you have paid. This is tracked by your accountant in your ‘franking account’. The new law allows you to first use up your tax credits accumulated at the old rate first – 30% - before you start using the credits from the tax paid at the lower rates. 

For example, on a dividend of $100 -
If the distribution was franked at 30%: $100/0.70*0.30 = $42.86 franking credit
If the distribution was franked at 28.5%: $100/0.715*0.285 = $39.86 franking credit

What happens if you are not a company but are a small business?

You may be eligible for what is called the small business income tax offset. This applies to a taxpayer who operates a small business entity as a sole trader or if they receive a share of net small business income from a partnership or a trust that is a small business entity. The offset is calculated as 5% of the following amount up to a limit of $1,000.

Total net small business income for the financial year x  Basic income tax liability for the income year
Taxable income for the financial year

Are YOU able to reduce your tax?

For further information on which items to include and exclude from this calculation, check in with the ATO or get in touch with your local RSM Team for personal assistance.