Understanding company tax rates

Understanding how company tax rates operate is critical – not only for being compliant, but also for making wise financial decisions that promote business development. From assessing your eligibility for the lower 25% rate to controlling passive income thresholds, tax categorization has a direct impact on how much of your revenues flow back into your organization.

In this guide, we break down the fundamentals of company tax rates in Australia, explain what qualifies a company as a base rate entity, and walk through detailed examples that show how the rules apply in practice. You’ll also find key strategies to help you manage your tax position effectively, especially in light of recent changes to eligibility criteria.

Understanding the basics

The company tax rate is at the core of business finance, a crucial factor shaping a company’s net income and its potential for reinvestment, growth and dividend distribution. This rate is a percentage of a company’s taxable income paid to the government, and its determination hinges on income types, such as passive income (earnings from activities in which the individual is not actively involved) and non-passive income, which is derived from personal exertion.

Understanding these tax elements is more than just following rules; it’s about smart financial planning. Understanding corporate and individual income tax is crucial for making informed decisions that help your business grow and stay financially healthy.

Differentiating corporate tax rates

The full company tax rate of 30% applies to all companies that are not eligible for the lower company tax rate. Eligibility for the lower company tax rate depends on whether you are a base rate entity from the 2017–18 income year onwards.

Base rate entity company tax rate

From the 2021–22 income year onwards, companies that are base rate entities must apply the 25% company tax rate.

A company is a base rate entity for an income year if:

• The company’s aggregated turnover for that income year is less than the aggregated turnover threshold for that income year.
• And it has 80% or less of their assessable income in that income year that is base rate entity passive income – this replaces the requirement to be carrying on a business from the 2017–18 income year onwards.

The aggregated turnover from any prior income year is irrelevant when working out if a company is a base rate entity for any particular income year.

Base rate entity passive income is:

• Corporate distributions and franking credits on these distributions
• Royalties and rent
• Interest income (some exceptions apply)
• Gains on qualifying securities
• A net capital gain
• An amount that a partner in a partnership or a beneficiary of a trust includes in their taxable income, if that amount can be linked (directly or indirectly) to income that counts as base rate entity passive income.

Example: base rate entity

Happy Feet Pty Ltd is a company that sells socks online. Its owner, Lloyd Chan, wants to expand the business into running shoes as well. The capital he needs to expand the business is put into a term deposit while he negotiates with suppliers.

In the 2024–25 income year, Happy Feet Pty Ltd has an aggregated turnover under the $50 million aggregated turnover threshold. Its assessable income is $104,000, comprising:

• $100,000 trading income from running the business
• $4,000 of interest income
• The interest income is base rate entity passive income. Because this income is only 3.8% of its assessable income, Happy Feet Pty Ltd is a base rate entity for the 2024–25 income year, and the 25% company tax rate applies.

Example: not a base rate entity because passive income is too high

Best Equity Ltd is a listed investment company that invests in Australian shares.

In the 2024–25 income year, Best Equity Pty Ltd has an aggregated turnover under the $50 million aggregated turnover threshold. Its assessable income is $5 million, comprising:

• $1 million of interest income
• $4 million in dividends
• 100% of Best Equity Ltd’s assessable income is base rate entity passive income. As a result, they are not a base rate entity for the 2024–25 income year and the 30% company tax rate applies.

Key takeaways

Understanding and managing company tax rates is crucial for any business’s success. This guide has provided valuable insights and strategies to help businesses optimise their tax positions — ready for you to apply them. Effective tax management goes beyond mere compliance; it requires strategic planning and adaptability, particularly in response to recent legislative changes.