SNAPSHOT New Corporate Tax Rate Legislation from 2016/17

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1 On September 206, the Treasury Laws Amendment (Enterprise Tax Plan) Bill 206 was introduced into Federal Parliament (refer The Bill introduces a variety of tax changes proposed in the May 206 Federal Budget (including Small Business Entity (SBE) concession changes such as the < $0 Million Aggregated Turnover increase from July 206 see separate Tax Astute snapshot for a summary of these changes). The new legislation also includes previously announced measures to gradually reduce the corporate tax rate to 25% by 2026/27. The following timeline illustrates how the corporate tax rate will reduce between July 205 through to July 2026 such that: in 205/6 Small Business Entity (SBE) status results in a 28.5% corporate tax rate if the company s current or prior year business aggregated turnover (defined in s ITAA 997) is < $2 Million (under existing legislation); under the new legislation, in 206/7 Small Business Entity (SBE) status results in a 27.5% corporate tax rate if the company s current or prior year business aggregated turnover (defined in s ITAA 997) is < $0 Million; between 207/8 and 2022/23 inclusive, Base Rate Entity (BRE) status will replace SBE status in order for a 27.5% corporate tax rate to apply. BRE status broadly requires a current year business and current year aggregated turnover to fall below the specified turnover threshold for each year (see below for further details); and from 2023/24 all corporate tax entities (including non-business/investment entities, life insurance companies and similar) will be subject to a single corporate tax rate, which is proposed to progressively reduce from 27.5% to 25% by July SBE Status allows < Rate (Business + Current/Prior Year Aggregated Turnover z < $2M (5/6) or <$0M (6/7) BRE Status allows < Rate (Business + Aggregated Turnover below increasing annual thresholds Timeline of proposed corporate tax rate changes ALL corporate tax entities on same rate from 23/24 /7/5 /7/6 /7/7 /7/23 /7/24 /7/ % 27.5% 25% SBE = Small Business Entity BRE = Base Rate Entity Rate Reduces each year until 25% from 26/27 Note that a company s tax rate for imputation/franking purposes may, in limited cases, vary from its tax rate payable for a particular year see below for further details. In this document "company" refers to any corporate tax entity. Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 206 Page

2 Importantly, the above summary timeline treatment arises from a number of complex proposed legislative changes which impact taxation issues ranging from the imputation/franking of dividends through to specific issues such as tax consolidation allocable cost amount and loss transfer calculations. Tax Astute clients will have access to all specific details in their forthcoming training session, with this summary providing an overview of: how to identify Base Rate Entity (BRE) status which is essential to access a 27.5% tax rate between 207/8 to 2022/23 inclusive; how to determine a company s corporate tax rate for imputation/franking purposes (in limited cases this may be different rate to the tax rate paid); and an overview of proposed corporate tax rates and franking calculations in forthcoming years. It is also important to note that current political uncertainty may cause changes to the current form of the proposed legislation before it receives Royal Assent. SBE vs BRE Status The below diagram illustrates key differences between corporate SBE status (which also allows access to a variety of other SBE concessions see separate Tax Snapshot for details) and the new corporate BRE status which will be relevant only for reduced 27.5% corporate tax rate access between 207/8 and 2022/23 inclusive, such that: as shown at A below, in 206/7 a company s SBE status will result in a 27.5% reduced corporate tax rate based upon the company carrying on a business in the current year and also having current or prior year aggregated turnover of < $0 Million (based on existing SBE and aggregated turnover provisions such as s ITAA 997); but as shown at B below between 207/8 through to 2022/23 inclusive, BRE status will replace SBE status as the key eligibility requirement for a 27.5% rate. BRE status also requires a current year company business and uses the concept of aggregated turnover from s ITAA 997. However, it differs from SBE status in that higher turnover thresholds will apply (see table below) and turnover testing appears to be limited to current year aggregated turnover (see proposed s 23AA ITRA 986 which requires aggregated turnover to be " worked out as at the end of that year"). SBE vs BRE Status for < Corporate Tax Rate (206/7 to 2022/23) SBE = Small Business Entity BRE = Base Rate Entity A Company with SBE Status (206/7) B Company with BRE Status z (207/8 to 2022/23 inclusive) BUSINESS carried on in & AGGREGATED TURNOVER < $0M Current or Prior Year BUSINESS carried on in & AGGREGATED TURNOVER < Threshold Note that a non-business company (e.g. an investment company) will remain on a tax rate until 2023/24 because its lack of a current year business will not allow SBE nor BRE status to apply. Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 206 Page 2

3 Corporate Tax Rate for Imputation/Franking (206/7 to 2022/23 inclusive) As noted above, if BRE status is present between 207/8 and 2022/23 inclusive, a company will pay tax at a lower 27.5% corporate tax rate based upon its current year aggregated turnover (including the business aggregated turnover of its connected and affiliate entities per existing s ITAA 997) falling below specified thresholds (see below). The proposed, legislation notes that, due to potential difficulties in estimating current year turnover before year end, a definition of "corporate tax rate for imputation" will be introduced between 206/7 & 2022/23 inclusive. Under this definition a BRE company s corporate tax rate for imputation/franking purposes will be calculated based upon its prior year aggregated turnover. While franking credit calculation will, in most cases, align with the rate of tax paid under this system, the following diagram (adapted from information in EM Example. and new s 23AA ITRA 986) illustrates the likely operation of the proposed rule and its potential for different corporate tax rates for tax payments and imputation/franking in limited cases. As illustrated below: in 205/6, a company has $23 Million current year aggregated turnover. A tax rate is therefore payable because the 205/6 SBE $2 Million aggregated turnover threshold has been exceeded. Under current legislation, all dividends are franked at the "standard corporate tax rate"; in 206/7 the company s current year aggregated turnover has risen to $24 Million. Once again the proposed 206/7 SBE aggregated turnover threshold of $0 Million has been exceeded such that a tax rate is payable. The proposed new legislation would deem the company s aggregated turnover for imputation/franking purposes to be the $23 Million 205/6 prior year turnover, resulting in a imputation/franking rate because the $0 Million SBE threshold is again exceeded; but in 207/8 (assuming that proposed s 23AA ITRA 986 limits BRE testing to current year aggregated turnover - see above) then the $26 Million current year turnover would mean a tax rate is payable (as the year s $25 Million turnover threshold is exceeded) but the corporate tax rate for imputation/franking would be 27.5% because the $24 Million prior year turnover is below the 207/8 $25 Million aggregated turnover threshold. Corporate Tax Rate for IMPUTATION z AT = Aggregated Turnover /7/5 /7/6 /7/7 /7/8 Corporate Tax Rate PAID AT = $23M (> $2M AT) AT = $24M AT = $26M (> $0M AT) (> $25M AT) Corporate Tax Rate for IMPUTATION /FRANKING (current legislation) ($23M deemed AT is > $0M) 27.5% ($24M deemed AT is < $25M) Note that while the above scenario illustrates a potential disadvantage from the proposed imputation rate treatment, such a scenario is likely to be relatively rare in practice. Equally, if instead the actual turnover had been $26 Million in 206/7 and $24 Million in 207/8 the opposite result is likely in 207/8 (i.e. 27.5% rate payable Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 206 Page 3

4 and imputation/franking rate). It is assumed that in 206/7 a company could choose either current or prior year aggregated turnover to assess its SBE status (and therefore its tax payable) under existing SBE provisions. Summary Corporate Tax Rate Issues from 206/7 onwards The following table summarises how the corporate tax rate is proposed to apply from 206/7, including calculations of likely after-tax income and maximum franking credit amounts. Note that, as with all currently proposed legislation changes, the details below may be changed between now and the Bill receiving Royal Assent. Income Year Proposed Corporate Tax Rate Changes from 206/7 A B C D E F G S ITAA 997 Required Net after-tax Gross Up Rate Company income calculation used to Required Aggregated Lower Company (if taxable calculate Status Turnover Tax Rate (%) income = MAXIMUM threshold for $00K) FRANKING CREDIT lower rate (Note ) 206/7 SBE < $0 Million 207/8 < $25 Million 208/9 < $50 Million 209/20 < $00 Million BRE 2020/2 < $250 Million 202/22 < $500 Million 2022/23 < $ Billion 2023/ / % $72,500 27% $73,000 rate for imputation - generally 2.64 (or / 2.33 if imputation rate see above) 2.70 Maximum Franking Credit on net aftertax income (E x F) (Note 2) $27,500 (or $3,07 if imputation rate) $27, /26 N/A (All Companies Eligible) 26% $74, $26, /27 onwards 25% $75,000 3 $25,000 Note The denominator figure in the calculations shown at column F represents the "corporate tax gross-up rate" which is broadly calculated as (00% - corporate tax rate for year)/corporate tax rate for year where the corporate tax rate for imputation purposes is used pre 23/24 with the general corporate tax rate used thereafter. Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 206 Page 4

5 Note 2 Column G above (in combination with column F above) illustrates the general principle that as the corporate tax rate reduces, the rate at which dividends may be franked will correspondingly reduce. There is, however, no specific opening franking account adjustment required as a company s tax rate reduces. WANT MORE DETAILS? In addition to details available at Tax Astute clients receive more information and specific details, questions and answers underlying the brief snapshot summary above as a part of: their Tax Astute training session; their Tax Astute reference notes; and their detailed multimedia recording. COPYRIGHT & DISCLAIMER STATEMENT Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 206 This training material snapshot summary is subject to copyright and may not be reproduced, reused or adapted in any manner, except in accordance with the Copyright Act 968 (Cth) for bona fide study purposes, other than with the express written consent of Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust). This material has been prepared with the objective of maximising accuracy and currency, but is provided for personal educational purposes only and must not be relied on as legal, financial or any other type of advice. Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) hereby excludes any and all liability arising, whether directly or indirectly, from the use of this training material snapshot summary and any information contained herein. Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 206 Page 5