Company tax cuts pass the Senate with amendments

After a marathon few days of extended sittings, the Government finally managed to get its company tax cuts through the Senate, but it was not without compromise.

The following outlines the final changes to the law, as passed by the Senate, including a recap of which of the original proposals remained intact and also which ones were changed.

Increase to the SBE turnover threshold

As was previously announced, the Small Business Entity (‘SBE’) definition has changed with respect to the turnover eligibility requirement.

The aggregated turnover threshold has increased from $2 million to $10 million with effect from 1 July 2016 (i.e., the current, 2017, income year).

Note that, whilst the increase in this threshold will expand access to most SBE concessions (e.g., simplified depreciation), this change will not apply with respect to:

• the Small Business Income Tax Offset (a special $5 million threshold will apply when determining eligibility for this tax offset); and
• the Small Business CGT concessions (the aggregated turnover threshold to access these concessions will remain at $2 million, although taxpayers may still seek to satisfy the $6 million maximum net assets test as an alternative method of obtaining access to these concessions).

Reduction in the corporate tax rate

The most significant difference between the Government’s original proposals and what was finally passed by Parliament was in relation to the reduction in the corporate tax rate.

Although the corporate tax rate will still decrease to 25% (by the 2027 income year, as originally proposed), access to the reduced corporate tax rate will be restricted to corporate entities that carry on business with an aggregated turnover of less than $50 million (from the 2019 income year).

The following table provides a summary of how the progressive reduction in the corporate tax rate will apply.

As noted above, corporate entities with at least $50 million aggregated turnover or, more importantly, companies that do not carry on business (e.g., passive investment companies and ‘bucket companies’) will continue to have a corporate tax rate of 30%.

Changes to the franking of dividends

Prior to this income year, companies that paid tax on their taxable income at 28.5% could still pass on franking credits to their shareholders at a rate of 30%, subject to there being available franking credits.

However, with effect from 1 July 2016 (i.e., this income year), the maximum franking credit that can be allocated to a frankable distribution paid by a company will be based on the tax rate that is applicable to the company.