Following the proposal for reduced tax rates for corporate entities in 2016, the Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017 (the Bill) was ultimately defeated in the Senate on 23 August 2018 by a vote of 36 to 30. 

The Bill proposed to progressively extend the 27.5% corporate tax rate to all entities (regardless of turnover) by the 2024 year. 

In the midst of parliamentary pandemonium, the controversial policy failed to attract a political consensus, leaving some concerned about a half-baked tax reform agenda and others welcoming the outcome.

So where does this leave corporate tax rates now?

With the proposed changes being rejected by the Senate and no further changes to the corporate tax rate from the 2018-19 year, corporate tax rates from the 2017-18 year will be as follows:

Year

Aggregated Turnover Threshold

Base Rate Entities (under the aggregated turnover threshold)

All other corporate entities

2017-18

$25 million

27.5%

30%

2018-19 onwards

$50 million

27.5%

30%

The Government has announced they will not seek to introduce any further legislation to reduce corporate tax rates, so it appears the reduced corporate tax rate will be limited to base rate entities with an aggregated turnover of less than $50 million from 1 July 2018 onwards.

Eligibility Criteria

Legislation that did pass in the Senate on 23 August 2018 however, was the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018.  This now provides clarity around the definition of “base rate entity” and assists corporate tax entities to determine their eligibility to access the reduced corporate tax rate of 27.5% from the 2017-18 year. corporate tax rates

Under this legislation, corporate tax entities will be eligible for the reduced tax corporate tax rate from the 2017-18 year; if:

  1. No more than 80% of its assessable income is base rate entity passive income; and
  2. Its aggregated turnover is less than $25 million.

But where does this leave corporate taxpayers now?

Existing legislation merely required that an entity with an aggregated turnover under $25 million should be “carrying on a business” in order to access the 27.5% corporate tax rate. A corporate taxpayer who meets the “carrying on a business” criteria may not meet the newly mandated 80% passive income criteria.

While taxpayers were reminded to rely on existing tax law until the proposed legislation changes were passed, this posed practical difficulties and some corporate taxpayers may now be faced with the prospect of amending 2018 Income Tax Returns and dividend notices.

Given the change in the eligibility criteria to access the current lower corporate tax rates, we recommend the following actions:

  • Tax returns prepared using the reduced corporate tax rate of 27.5% should be reviewed and amended where the 80% passive income threshold is breached;
  • Deferred tax asset/liability calculations for Financial Statement disclosure purposes should be reviewed to ensure the correct corporate tax rate has been applied;
  • Cash flow budgets and forecasts should be reviewed to ensure the appropriate corporate tax rate has been applied;
  • Dividend franking for the period 1 July 2017 to 30 June 2018 should be reviewed to ensure the appropriate franking percentage has been used; and
  • Where a lower franking percentage has been applied to dividends, shareholders should be notified of the correct franking amount.

While the politics of tax reform will continue to be disputed on the hill, back at the office there are those who will be impacted by the changes to tax rate legislation. It is important to seek advice on the changes and ensure eligibility requirements are met.

For more information

Are you impacted by the changes to corporate tax rate legislation? Let us help, please contact your local RSM office.