There seems to be some confusion around company tax rates, especially whether a small to medium business is eligible for the lower tax rate.
The lower tax rate of 27.5 percent, rather than 30 percent, depends on two factors: whether the business was considered a small business entity in the 2016 and 2017 financial years, and whether it was a base rate entity for the 2018 financial year (the current measure).
A small business entity is ‘a business that has aggregated turnover below $10 million and is trading for at least part of the financial year.’ That was the old measure to determine eligibility for the lower company tax rate in 2016-17. It has been replaced by the base rate entity model.
A base rate entity, according to the ATO, is a company that is carrying on a business which has an aggregated turnover less than the turnover threshold of $25 million in 2017-18.
Which Entity Type is Your Business?
Many of our small business clients will likely fit the description of base rate entity, but always ask us if your business income sits close to those lines.
This lower tax rate of 27.5 percent will remain until 2024-25, whereupon it is planned to fall 0.5 percent and then 1 percent (twice) in three FY stages.
From this financial year (2018-2019) on, many larger SMEs will enjoy a larger aggregated turnover threshold of $50 million, which will allow many businesses to enjoy this slightly lower tax rate from now on.
Plan your Tax Minimisation
Don’t forget, when planning your expenditures and PAYG for the year, to compare this 27.5 percent tax rate with your own individual income tax rate on drawings and salary. It may not be all that different, but just check. Also discuss this tax planning with your accountant, before making any firm decisions to raise or lower your salary for tax purposes.