Income tax
Company tax rate
The company tax rate is the rate at which a company's taxable income is taxed, generally 25% for a base rate entity and 30% for other companies.
A company is a separate legal entity and pays income tax on its own taxable income, at a flat rate. Unlike individuals, companies do not have a tax-free threshold or a graduated scale. There are two main rates: 25% for companies that qualify as base rate entities, and 30% for all other companies. The rate that applies depends on the company's circumstances each year.
To qualify for the lower rate, a company must be a base rate entity. This requires that its aggregated turnover be below a threshold set by legislation, and that no more than 80% of its assessable income be base rate entity passive income, such as dividends, interest and rent. The turnover threshold has changed over time, so check the ATO website for the current figure.
The rate applies to the company's taxable income, which is its assessable income minus deductions. Companies lodge their own company tax return, and pay PAYG instalments throughout the year. If a company has a tax loss, it may be carried forward, subject to tests such as the continuity of ownership test or the same business test, so the loss may be available in later years.
When a company pays tax, it creates franking credits that can be passed to shareholders with dividends. The amount of the credits relates to the tax rate that the company paid, so the maximum franking credit percentage depends on whether the company is a base rate entity. Shareholders who are residents may use franking credits to offset their own tax.
There is a difference between company tax and the tax paid by the shareholder on dividends. The profit is taxed at the company level first, and then dividends paid out are included in the shareholder's assessable income, with franking credits to prevent double taxation. Owners of small companies should consider this layered effect when deciding how much to pay themselves as wages or dividends.
The company tax rate has no connection to GST, which is a separate 10% tax on supplies, though a company that is registered for GST reports it on BAS like any other entity. Company rates can be changed by legislation, so verify current details. This is general information only, so confirm your position with the ATO or a registered tax professional.
Worked example
A company that is a base rate entity earns taxable income of $200,000 for the year. Tax at 25% is $200,000 x 25% = $50,000. If the same company were not a base rate entity, for example because too much of its income was passive, tax at 30% would be $200,000 x 30% = $60,000, a difference of $10,000.
Practical tips
- Check each year whether your company qualifies as a base rate entity, as eligibility can change.
- Remember that dividends are taxed again in shareholders' hands, with franking credits reducing the impact.
- Look at the ATO website for the current aggregated turnover threshold, because it is set by legislation.