Base Rate Entity explained: Tax rates, eligibility and key rules

April 30th, 2025 Taxation News and Advice

Understanding what it means to be a Base Rate Entity (BRE) can make a real difference to the tax obligations of small and medium-sized companies in Australia.

Since its introduction, the BRE framework has become a key part of how company tax rates are determined under federal tax law. The concept superseded the previous Small Business Entity regime and enables more companies to qualify for a lower corporate tax rate, as long as they meet the necessary eligibility requirements.

For companies navigating these rules, it’s important to understand how the tax rate, income type and aggregated turnover affect status and tax liability. Getting it right ensures compliance and can offer strategic advantages when it comes to financial planning, dividend distribution and reporting obligations. If you’re unsure how these changes apply to your business, our team at Wilson Porter can help.

What is a Base Rate Entity?

A base rate entity is a classification under the 1997 Income Tax Assessment Act that determines whether a company qualifies for the reduced corporate tax rate of 25%. A company will be considered a base rate entity for a given income year if it meets two conditions:

Its aggregated turnover for that income year is less than $50 million
80% or less of its assessable income is classified as base rate entity passive income (BREPI)

This framework was formalised in the 2018 Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act. It was designed to simplify access to reduced tax rates by moving away from the more restrictive Small Business Entity definition. From the 2018–19 income year, companies no longer needed to demonstrate that they were carrying on a business to qualify.

What benefits do Base Rate Entities receive?

The primary benefit for base rate entities is access to a lower company tax rate. As of the 2021–22 income year, the corporate tax rate for eligible entities is 25%, down from the standard 30% corporate tax rate. Prior to this, transitional rates applied:

From the 2017–18 to 2019–20 income years, the tax rate was 27.5%
For the 2020–21 income year, the tax rate was 26%

This reduction can result in thousands of dollars in tax savings, especially for growing companies reinvesting profits. However, eligibility must be reassessed each tax year, as changes to income composition or turnover may affect a company’s BRE status.

To explore how this applies to your business structure, take a look at our Tax Services.

Eligibility criteria for Base Rate Entity status

To qualify as a base rate entity, companies must satisfy both the turnover threshold and the income type requirement.

The aggregated turnover condition looks beyond the company’s own income. It includes the total ordinary income derived during the income year by the company, as well as any connected entities or affiliates. However, certain types of income are excluded from this calculation. These include capital gains, GST, franking credits, retail fuel sales and transactions with connected entities.

A connected entity shares a level of control with the company, such as a parent or subsidiary, or entities controlled by the same third party. Affiliates, on the other hand, are individuals or companies that act in accordance with the company’s business decisions. Notably, trusts, super funds and partnerships cannot be affiliates.

The second eligibility requirement is that no more than 80% of the company’s assessable income can be classified as passive income. This is where BREPI becomes important.

What is Base Rate Entity Passive Income (BREPI)?

Passive income, for tax purposes, includes a range of non-operating income sources. According to the ATO, income is classified as BREPI if it falls into one of the following categories:

Dividends, unless they are non-portfolio dividends — meaning the company holds at least 10% of the voting power in the company paying the dividend
Franking credits associated with dividends
Interest income (exceptions apply to financial institutions)
Royalties and rent
Net capital gains
Gains on qualifying securities
Income received from a trust distribution or as a partner in a partnership, if that income is traceable to passive sources

For example, if your company is a beneficiary of a trust that earns only rental income, the amount you receive will be classified as BREPI. However, if the trust earns income from trading activities, the distribution may be active business income, not passive.

Also important is that franked dividends passed through a trust cannot be classified as non-portfolio dividends, even if they meet the shareholding criteria. Instead, they’ll count toward the 80% passive income test.

Female software engineer in meeting by whiteboard

Franking credit implications

Companies that qualify as base rate entities not only pay a lower corporate tax rate, but they also have to frank dividends at that same rate. This is known as the maximum franking rate, and it applies to dividends distributed in the current income year, based on the company’s eligibility in the previous income year.

So if your company qualified for the 25% tax rate last year, you may only frank this year’s dividends at 25%. If it didn’t qualify, the franking rate would be the standard 30%.

Franking mismatches can create complications for shareholders, particularly if they’re expecting higher credits. That’s why tracking your company’s aggregated turnover and passive income from year to year is essential for tax planning.

Key differences: Small Business Entity vs. Base Rate Entity

Before 2018, access to the lower corporate tax rate was limited to Small Business Entities. To qualify, a company needed to:

Actively carry on a business
Have an aggregated turnover under $10 million

The shift to the base rate entity model expanded eligibility. Under the current law:

There is no requirement to carry on a business
The aggregated turnover threshold is higher at $50 million
Passive income limits play a more central role in determining eligibility

This broader scope aligns better with companies that earn mixed income from trading, investments and property.

Common scenarios and passive income thresholds

Let’s look at a few examples to show how this plays out in practice:

Scenario 1: Qualifies
Company A generates $500,000 from active trading operations and $100,000 in rental income. Because passive income accounts for just 16.7% of total income, the company meets the BREPI requirement and qualifies for the 25% company tax rate.

Scenario 2: Doesn’t qualify
A business earns $800,000 in dividends and interest income, with only $100,000 from trading. Since passive income makes up 88.9%, the company is not eligible for the lower tax rate.

Scenario 3: Trust distribution
A trust earns income solely from rent, then distributes $200,000 to a company. Since the income is traceable to rent, it remains passive income in the company’s hands. However, if the trust had earned revenue from active business income, the distributed amount would not be BREPI.

FAQs

What is a Base Rate Entity?
A BRE is a company with aggregated turnover under $50 million and 80% or less passive income in a given income year.

What is Base Rate Entity PSI?
PSI (Personal Services Income) is governed by different provisions and does not apply to Base Rate Entity status.

Who is eligible for the 25% tax rate?
Companies that satisfy both the turnover and passive income tests during the income year are eligible for the 25% tax rate.

What is the WHT rate in Australia?
Australia’s withholding tax rate (WHT) is generally 30%, though international tax treaties may reduce it.

How Wilson Porter can help

Assessing whether your company is a base rate entity isn’t always straightforward. Complexities arise when identifying connected entities, calculating assessable income and determining the maximum franking rate. Our experienced advisors can help with: