RSM Australia

Corporate Tax Rate reductions and the impact on shareholders

In the 2016–17 Budget, the Government announced its intention to reduce the corporate tax rate from 30% to 25% by the 2026-27 income year.  These changes were outlined in the Treasury Laws Amendment (Enterprise Tax Plan) Bill and after minor amendments by the Senate, received Royal Assent on 19 May 2017.

Additionally, in an effort to increase the scope of entities to which the reduced corporate tax rates could apply, Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 was introduced to the House of Representatives on 11 May 2017.  Royal Asset is yet to be granted.tax

Enterprise Tax Plan No.1

From the 2016-17 income year, the corporate tax rate for small business entities will be reduced from 28.5% to 27.5%.  To be considered a small business entity, the entity must:

  • be carrying on a business for all or part of the income year; and

  • have an aggregated turnover of less than $10 million (increased from $2 million in previous years).

Additionally, the turnover threshold will be progressively reduced for “base rate entities” that is, entities which do not meet the small business entity criteria but meet the corporate tax rate reduction turnover thresholds.

Small Business Entities

Income Year

Turnover Threshold

Corporate Tax Rate

2016-17

$10m

27.5%

2017-18

$25m

27.5%

2018-19

$50m

27.5%

 

 

Base Rate Entities

Income Year

Turnover Threshold

Corporate Tax Rate

2017-18

$25m

27.5%

2018-19

$50m

27.5%

2019-20 to 2023-24

$50m

27.5%

2024-25

$50m

27%

2025-26

$50m

26%

2026-27

$50m

25%

A corporate tax entity will not know its aggregated turnover until after year end.  For imputation purposes, the maximum franking credit that can be allocated to a frankable distribution paid by a corporate entity is based on their applicable corporate tax rate for that particular year. 

To ensure the operation of the imputation system is not altered, corporate tax entities will be required to frank distributions based upon the assumption their current year aggregate turnover is equal to the aggregate turnover from the previous income year.  The situation may arise where a corporate tax entity is subject to a 30% tax rate one year and then, as a result of the law changes, accesses the reduced corporate tax rate the next year during which time a dividend has been paid.     


Example

Application of tax rate change

For the 2015-16 income year, ABC Co had an aggregated turnover of $8.5m.  As ABC Co did not meet the small business entity criteria, it was subject to a 30% corporate tax rate.  For the 2016-17 income year, ABC Co had an aggregated turnover of $9m.  As a result of the corporate tax rate reductions coming into effect from 19 May 2017, ABC Co would now qualify as a small business entity and the corporate tax rate for ABC Co would be reduced to 27.5% for the 2016-17 income year.

Franking credit reduction

On 1 January 2017 ABC Co paid a $100 fully franked dividend to each shareholder.

In accordance with the imputation rules, ABC Co provided a franking credit of $42.86 with each dividend on the assumption ABC Co had a corporate tax rate of 30% based upon the aggregate turnover of the 2015-16 year being outside the small business entity thresholds.  However, as a result of the law changes on 19 May 2017, ABC Co now has a corporate tax rate of 27.5% for the 2016-17 income year.  As a result, ABC Co can only pass on franking credits on its distributions to shareholders up to its corporate tax rate of 27.5%. 

In this situation, the amount of franking credits disclosed on the distribution statements provided to shareholders would be incorrect.

Notifying shareholders

ABC Co must inform its shareholders of the correct franking credit to which they are entitled under the revised corporate tax rate in writing without reissuing the distribution statement.  The Commissioner will not impose penalties on ABC Co for giving a member an incorrect distribution statement provided it gives written notice to each of its shareholders clearly showing the correct amount of the franking credit.  The notice to shareholders should include the following details:

  1. name of the entity making the distribution;
  2. date on which the distribution was made;
  3. amount of the distribution;
  4. revised amount of franking credit allocated to the distribution, rounded to the nearest cent;
  5. franking percentage for the distribution, worked out to two decimal places;
  6. amount of any withholding tax deducted from the distribution; and
  7. name of the member. 

Planning matters

Please note, where a corporate tax entity has amassed a significant franking credit balance, some analysis should be undertaken to ascertain whether the entity would likely be subject to a reduced corporate tax rate.  Companies and shareholders may be disadvantaged where corporate tax was paid at 30% but a dividend is paid when the reduced corporate tax rates apply.  Therefore, the timing of dividends becomes a critical issue.tax

Additionally, shareholders who receive dividends from corporate tax entities that access the reduced corporate tax rate, may now pay higher ‘top-up’ tax when the dividends are included in their individual tax returns.  Shareholders will only be entitled to franking credits to the extent of the corporate tax entity’s tax rate.    

Enterprise Tax Plan No.2

Although yet to receive Royal Assent, the Government is proposing to extend the corporate tax rate reduction to all corporate taxpayers on the basis below.  At this stage, it is uncertain whether the above will proceed.   

  Income Year

Turnover Threshold

Corporate Tax Rate

2019-20

$100m

27.5%

2020-21

$250m

27.5%

2021-22

$500m

27.5%

2022-23

$1b

27.5%

2023-24

All

27.5%

2024-25

All

27%

2025-26

All

26%

2026-27

All

25%

 

 

Please contact your local RSM office to discuss how these changes may impact you and your business.


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