Tax Insight: Reduced corporate tax rate – New passive income test

19 October 2017

Yesterday, the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 was introduced in the House of Representatives, placing further limits on the eligibility for the reduced corporate tax rate, currently 27.5%.

What’s changed?

Currently, a company qualifies for the reduced corporate tax rate of 27.5% if they are a corporate tax entity that is a ‘base rate entity’. A base rate entity is a corporate tax entity that carries on a business and has an aggregate turnover of less than:

  • $25 million for the 2017-18 income year (ie the current financial year);
  • $50 million for the 2018-19 income year; and
  • Progressively increasing to $1 billion in the 2022-23 income year.

Under the proposed changes, to qualify as a base rate entity the ‘carrying on a business test‘ will be replaced with a ‘passive income test‘.

Passive income test

Under the passive income test, companies generating predominantly passive income will not be eligible for the lower corporate tax rate.

Under the new rules, a corporate tax entity will qualify for the lower corporate tax rate for an income year if:

  • It meets the aggregated turnover threshold test (above); and
  • No more than 80% of its assessable income for that income year is ‘passive’.
What is passive income?

Broadly, passive income includes the following:

  • Most dividends, where the shareholder has less than 10% voting power;
  • Interest income;
  • Royalties;
  • Rent;
  • Net capital gains; and
  • Gains on securities.
Date of effect

Provided the Bill passes both houses of Parliament, it will apply prospectively from the 2017-18 income year, commencing on 1 July 2017.

Impact on business

Ultimately, the reduced corporate tax rate will apply to most eligible companies. Given we are almost half way through the current financial year, companies expecting to generate a large amount of passive income, should consider now whether it is possible to qualify for the reduced tax rate.

Please contact a member of our National Taxation Group to discuss how these changes could impact you.

This article was written by Nima Sedaghat, Partner and Alina Sedmak, Associate.

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