Reduced Corporate Tax Rate – Beware of the Traps!
The lower corporate tax rate at 25% from the 2022 income year onwards for base rate entities (BRE) has certainly made companies attractive vehicles for operating SBE businesses. The recent re-introduction of the loss carry-back rules have further increased the popularity of companies.
While these are compelling reasons for using companies, there are a myriad of tax issues that accountants need to be aware of. The base rate entity rules themselves seem to have created confusion amongst tax practitioners. As recently as 20 October 2021, the ATO released an addendum to LCR 2019/5 which provides the ATO’s guidance on the base rate entity rules, clarifying that the relevant year for calculating a company’s aggregated turnover is the current income year.
This is to be contrasted with the small business entity rules that require consideration of the prior year aggregated turnover. For imputation purposes, however, the company must consider its aggregated turnover and base rate passive income for the prior year and apply the current year corporate tax rate. Put simply, if a company qualified as a BRE in the 2021 year, it franks dividends paid in 2022 at the 25% tax rate. This is regardless of whether it still qualifies as a BRE in 2022.
The relevant test years have particular importance when the corporate tax rate has been reducing (i.e. from 26% in 2021 to 25% in 2022).
The loss carry-back rules add some level of complexity to the application of the corporate tax rate. One of the steps in calculating the loss carry-back offset requires multiplying the loss amount with the corporate tax rate for the loss year. For example, if a $100,000 tax loss incurred in the 2021 year is carried back to the 2019 income year, the loss carry back offset would be $26,000, notwithstanding that the tax paid on the $100,000 income derived in the 2019 year was $27,500 (at the corporate tax rate of 27.5% in 2019).
On the face of it, the reduction on the corporate tax rate appears straightforward – the rates have gradually reduced over the years and we need to apply the BRE tests to work out the eligibility each year to apply the lower rates. However, as outlined above, the application of those rules are not necessarily that simple.
If you have any queries in relation to the above, please contact Gaurav Chitnis.