Damon Mcknight
In Australia, a base rate entity (BRE) is a company that pays a lower rate of tax than the standard 30% company tax rate. The lower tax rate for base rate entities is currently 25%. To be classified as a base rate entity, a company must have an aggregated annual turnover of less than $50 million and derive 80% or less of its assessable income from passive sources. The concept of base rate entities was enacted in Australia in 2018, with the rate decreasing from 27.5% in 2017-18 and 2018-19, to 26% in 2020-21, and finally to 25% from 2021-22 onwards.
| Characteristics | Values |
|---|---|
| Company tax rate | 25% (2021-22 income year onwards) |
| Previous company tax rates | 27.5% (2017-18 to 2019-20 income years), 26% (2020-21 income year) |
| Standard company tax rate | 30% |
| Aggregated turnover threshold | AUD$50 million (2021-22 income year), AUD$25 million (2017-18 income year) |
| Assessable income | 80% or less from base rate entity passive sources |
| Examples of base rate entity passive income | Interest income, rent, royalty, trust and partnership income |
| Non-base rate entity passive income | Income derived by financial institutions, registered bodies providing finance or businesses with Australian credit or financial services licenses |
| Eligibility criteria | Aggregated turnover below the threshold, 80% or less of assessable income from passive sources |
| Legislation | Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act 2018, passed on 23 August 2018 and enacted on 31 August 2018 |
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What You'll Learn
Base rate entity passive income
In Australia, a base rate entity is a company that meets specific criteria and is therefore eligible for a lower company tax rate. The base rate entity tax rate was 27.5% from the 2017-18 to 2019-20 income years, 26% in the 2020-21 income year, and 25% from the 2021-22 income year onwards.
To be classified as a base rate entity, a company must have an aggregated turnover for an income year lower than the aggregated turnover threshold for the same tax year. Additionally, no more than 80% of its assessable income for the year can be base rate entity passive income.
It is important to note that the aggregated turnover from any prior income year is irrelevant when determining if a company is a base rate entity for a particular income year. The classification is based solely on the income and turnover of the current year.
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Tax rates
In Australia, companies are subject to two main corporate income tax rates: a standard corporate tax rate and a lower base rate for certain small businesses. The standard corporate tax rate for companies not classified as base rate entities is 30%.
Base rate entities, on the other hand, benefit from a reduced tax rate of 25%. This lower rate was previously 27.5% from the 2017-18 to 2019-20 income years and 26% in the 2020-21 income year. The lower rate provides tax relief to smaller businesses and enhances their cash flow and profitability, allowing for reinvestment and growth.
To be eligible for the lower tax rate, a company must meet certain conditions. Firstly, the company's aggregated turnover for the previous income year must be less than $50 million. This includes the combined income of the company and any connected entities. Secondly, no more than 80% of the company's assessable income can be classified as base rate entity passive income, which includes income from sources like dividends, interest, rent, and royalties.
It is important to note that eligibility for the lower company tax rate also depends on whether the company is a base rate entity from the 2017-18 income year onwards. Companies that are not base rate entities but are Small Business Entities (SBEs) had a corporate tax rate of 27.5% from the 2017 financial year. To be classified as an SBE, a company must have carried on a business in the current year and met a $10 million aggregated turnover threshold cap.
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Aggregated turnover
The Australian Taxation Office (ATO) has stated that an entity's aggregated turnover should be calculated with reference to its income year. This means that the annual turnovers of connected entities or affiliates must be calculated using the test entity's income year, even if they have different financial year ends.
In order to qualify as a base rate entity, a company's aggregated turnover for the previous income year must be less than the threshold, which was $25 million for the 2017-18 income year and increased to $50 million from the 2018-19 income year onwards. This threshold ensures that the lower tax rate benefits small businesses and startups the most.
Calculating aggregated turnover can be complex, especially for entities that are members of large groups or groups with different income years. It is crucial for companies to accurately determine their aggregated turnover to assess their eligibility for concessions and other tax benefits.
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Assessable income
A company's assessable income is a key factor in determining its eligibility for base rate entity status in Australia. This status offers tax advantages to small businesses.
In calculating assessable income, it is important to consider the different types of income and their specific treatments. For example, interest income is typically considered passive, but there are exceptions, such as when it is derived by financial institutions or businesses with specific licenses. Rent, on the other hand, is generally classified as passive income, even if it is earned through the operation of a business. Trusts can further complicate the calculation, as the type of income earned by the trust (passive vs. active) will determine whether distributions to beneficiaries are considered passive or active income.
The Australian Taxation Office (ATO) provides detailed information on determining assessable income and base rate entity eligibility. Businesses should consult this information and seek advice from registered tax agents or accountants to ensure accurate calculations and compliance with tax laws.
Overall, by considering the sources and proportions of their assessable income, companies can evaluate their eligibility for base rate entity status and potentially benefit from the associated tax advantages in Australia.
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Corporate tax entity
In Australia, companies are subject to two main corporate income tax rates: a standard corporate tax rate and a lower base rate for certain small businesses. The standard corporate tax rate for companies not classified as base rate entities is 30%.
The concept of a base rate entity was enacted in the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act 2018. A base rate entity is a designation for a company in Australia that qualifies for a lower company tax rate of 25%. Small businesses with an aggregated turnover of less than $50 million for the previous income year are eligible. This includes the turnover of any connected entities, ensuring only truly small businesses benefit from the lower tax rate.
To be considered a base rate entity, a company must meet the following criteria:
- The company's aggregated turnover for the previous income year is less than $50 million.
- No more than 80% of the company's assessable income is classified as base rate entity passive income. This includes income from dividends, interest, rent, and royalties.
Base rate entities benefit from a reduced tax rate of 25%, which enhances their cash flow and profitability, allowing for reinvestment and growth. This lower rate significantly benefits small businesses, allowing them to reinvest more of their profits back into their operations.
It is important to note that eligibility for the lower company tax rate depends on whether a company is a base rate entity from the 2017-18 income year onwards. Companies that are base rate entities must apply the 25% company tax rate from the 2021-22 income year onwards. The rate was previously 27.5% from 2017-18 to 2019-20 and 26% in the 2020-21 income year.
For accurate tax planning and compliance, companies need to determine their eligibility for the standard or lower base rates, as it significantly impacts their tax liabilities and overall economic health.
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