Income tax
Base rate entity
A base rate entity is a company, or other entity, with aggregated turnover under a set threshold and mostly active income, which qualifies for the lower 25% company tax rate.
Base rate entity is the label given to a company that qualifies for the lower company tax rate, which is 25%. All other companies pay 30%. The concept is aimed at smaller and mid-sized companies that carry on an active business, rather than those that mainly hold investments.
Two conditions must be met in the income year. First, the company's aggregated turnover must be below the threshold set by legislation. Second, no more than 80% of the company's assessable income can be base rate entity passive income. Passive income includes things such as dividends, franking credits on those dividends, interest, royalties, rent and net capital gains.
Aggregated turnover is not just the company's own sales. It includes the turnover of connected entities and affiliates, so a group of related businesses may combine to exceed the threshold even if each is small. Turnover is calculated on a particular basis, generally excluding GST and certain transactions between related entities, and it is measured over the income year, with special rules for the previous year in some cases.
The passive income test often surprises owners of investment companies. A company that mainly holds a rental property or a share portfolio might have more than 80% of its income in the passive category and so would be taxed at 30%, even though its turnover is small. An operating company with some interest income will typically still qualify.
The rate you use for the year affects other calculations, including the maximum franking credit that can be attached to dividends. A base rate entity can generally frank dividends at the rate corresponding to its tax rate for the year, which is measured using the rate that applied in the prior year in some cases. Check ATO guidance on franking when paying dividends.
Whether you are a base rate entity has no direct effect on GST, although turnover figures used for various tests are related to concepts used in GST. Keep records of turnover and the type of income you receive. This is general information only, so confirm whether your company qualifies with the ATO or a registered tax professional.
Worked example
An operating company has aggregated turnover under the threshold, trading income of $450,000 and interest income of $10,000. Passive income is $10,000 of $460,000, about 2%, well under 80%, so it is a base rate entity. Tax at 25% on taxable income of $120,000 is $30,000, compared with $36,000 at 30%, a saving of $6,000.
Practical tips
- Check both tests, turnover and passive income, because failing either one means the 30% rate applies.
- Include turnover of connected entities and affiliates when calculating aggregated turnover.
- Look up the current turnover threshold on the ATO website, since it is set by legislation.