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Company Tax Rate Changes Create Confusion

Article By Adam Hurwood | | Accounting & Tax

As part of the 2016-17 Federal Budget, the government announced that it intended to progressively reduce the corporate tax rate, with small business being the first to receive the reduction. The following table provides an outline of how the reduction in the corporate tax rate will be phased in:

These rates are restricted to corporate entities that are:

  • Carrying on a business, and
  • Have an aggregated turnover of less than the indicated threshold.

Consequently, corporate entities that receive family trust distributions (e.g. Corporate Beneficiaries) and/or solely derive passive investment income, will continue to be taxed at 30% as they are not considered to be carrying on a business.

Shareholders of companies operating small businesses appear to have been inadvertently affected due to a change in calculating franking credits. Small business companies with prior year retained profits would have been taxed at a company tax rate of 30%, thereby allowing those profits to be paid as dividends with a 30% franking credit. In the 2016 year, the franking credits calculation was based on the 30% rate, even though the initial corporate tax reduction to 28.5% applied to business with less than $2 million in turnover. However, from 1 July 2016 this is no longer the case. The ATO has advised that the calculation of franking credits attaching to dividends must be based on the company’s tax rate for that particular year. Therefore, companies with turnover less than $10 million in the 2017 year must calculate franking credits based on 27.5% rather than 30%.

The tax rate reductions became law on 19 May 2017 (but are effective from 1 July 2016) and will have an impact on small businesses that paid dividends and provided dividend statements to their shareholders showing a 30% franking credit during the 2017 year. The ATO has confirmed that there will be no penalties imposed for providing the incorrect franking information, companies will still need to rectify this change to enable shareholders to correctly lodge their tax returns. The ATO has also issued a guideline which sets out procedures for companies to use to for compliance purposes.

For further information on the company tax rate changes and how they apply to you, please contact your Altitude Adviser.