RSM Australia

Corporate tax rates – what lies beneath, a set of steak knives perhaps?

A joint media release by PM Scott Morrison and Treasurer Josh Frydenberg announces more changes to corporate tax rates. The announcement lands less than two months after former PM Malcolm Turnbull promised the Federal Government would not introduce any further legislation to change corporate tax rates before the next election.

The announcement brings some good news – the proposed changes seek to fast-track the reduction of corporate tax rates (to 25%), originally legislated for 2026-27, to now apply in 2021-22.  The good news extends to unincorporated businesses, with their access to the increase in tax discount of 16% also proposed to be fast-tracked to the 2021-22 year.

Touted as ‘building on the first stage of company tax relief’ delivered by the government in May 2017, the proposed legislation is being prepared for introduction within the next two weeks. The media release proudly announces that the new legislation will provide tax relief for more than three million businesses employing nearly seven million Australians, resulting in more investment, more jobs and higher wages.


Is it all smoke and mirrors or is this just what we need to fuel economic growth?

The example used in the media release is of a small business that makes a $500,000 profit. In accordance with the proposed legislation, the fast-tracking of tax cuts would result in this small business making a tax savings of $7,500 in Corporate tax rates2020-21 and $12,500 in 2021-22. This amount may not be quite the carrot to motivate small business to invest, employ more staff or increase wages. 

A significant omission in this good news story is the negative impact on companies and their resident shareholders from the ‘quarantining’ of franking credits in the company franking account or the increase in tax payable by individual resident company shareholders who receive franked dividends.   

Another unfortunate reflection is that the fast-tracking of the corporate tax cut will not allow time for companies who have retained prior year profits to fund business operations, to pass on the tax paid on those profits (e.g. tax paid at 30%) to resident shareholders. 


Example

Take for example a company operating as a primary production or other small business for the past 20 years.  The company, owned by the same family group, has retained profits of $2 million and a franking account balance of approximately $860,000.  If the company paid a fully franked dividend to shareholders to the extent of the retained profits in the 2021-22 year, under the proposed changes, the company is limited to a franking rate equal to the 2021-22 proposed tax rate of 25%.  In practical terms, this would mean the shareholders would receive a reduced franking credit and approximately 22% of the available franking credits would be left quarantined in the company franking account.


So how would this impact on individual shareholders?Corporate tax rates

Assuming the marginal tax rate for the individual shareholders in the example above is 30%.  The reduction in the franking credit received on franked dividends would result in an increase in tax payable by the shareholders of approximately $57,000.   Without adequate planning, privately owned companies could find themselves in a position where they make a minimum tax saving on their company tax bill, but at the same time have a significant tax bill in their individual returns. 

Again, hardly an incentive to invest, provide more jobs or increase wages.

The outcome of the proposed changes could also have a significant impact on family groups who operate small businesses through company structures and individuals who have invested in a small to medium size Base Rate Entity (BRE).

The fast-tracking of the legislation may not give these small investors time to re-think investments or plan for the additional cash needed to pay unexpected and unplanned tax bills.


On closer inspection, we are left questioning if the proposed legislation keeps small to medium size Aussie businesses competitive or even protects our economy. Will it just result in more confusion, a reduction in investment and higher tax costs to individual Australian taxpayers?

Perhaps a more welcome change would be the re-introduction of proposed tax cuts for corporate taxpayers with turnover over $50 million, where tax cuts would result in savings significant enough to encourage investment, new jobs, and higher wages.

The wait is on as we anticipate the preparation of the new legislation to be introduced to Parliament.


FOR MORE INFORMATION ON CORPORATE TAX RATES
For more information on corporate tax rates, contact your local RSM Tax specialist.

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