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1 July Company Tax Rate Reduction

June 2020


As part of the larger progressive reduce company tax, small to medium businesses will see their rate reduce to 26% from 1 July, 2020.

The 1 July company tax rate change for SMEs is part of a larger progressive plan to reduce the company tax rate to 25% from 1 July 2021 and applies to base rate entities (BRE) - companies, corporate unit trusts, and public trading trusts -  with an aggregated turnover of less than $50 million where 80% or less of the entity's turnover for the year is classified as base rate entity passive income. Larger companies will continue to pay the 30% rate.

 

2018-19 and 2019-20

2020-21

2021-22

Base rate entities*

27.5%

26%

25%

Other corporate tax entities

30%

30%

30%

*aggregated turnover less than $50m and no more than 80% of the company's assessable income is base rate entity passive income.

Maximum Franking Rates also Change

The reduction in the company tax rate will also change the maximum franking rate that applies to dividends paid by some base rate entities.

The way the rules normally work is that if the company was classified as a base rate entity and was taxed at the lower corporate tax rate in the previous year then a lower maximum franking rate will apply to dividends paid in the current year.

For example, a company that was classified as a BRE in the 2019 income year will generally be subject to a maximum franking rate of 27.5% on franked dividends paid in the 2020 income year. However, the maximum franking rate will normally be 26% for dividends paid in the 2021 income year if the company was a BRE in the 2020 income year.

Some companies may have franking account balances that have accumulated over time and will reflect prior company tax rates. It is important to consider how these credits can be utilised in an efficient manner.

One strategy could be to bring forward the payment of dividends to utilise the current 27.5% franking rate before the company tax rate reduces to 26% if the cashflow of the company allows for it.

Speak to Your Accountant

The changes outlined in this article are informative in nature and not advice – we strongly recommend you speak to your accountant if any of the above information is likely to impact your business. Call us on 02 9957 4033 for expert advice.

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Disclaimer

This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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