Is it Enterprising to Reduce the Corporate Tax Rate

Published Thursday, 21st June, 2018 | By Susan AKA Peacefull

The belief here is that if the big corporates have a lower tax rate they can invest their money more productively. The byproduct is that it has a trickle down effect in the economy. Is that true?

Tonight the tax cuts were passed. I personally do not think that fiscal policy as tax cuts will do anything in light of the global economic drivers and challenges ahead. I see the future tax cuts for higher income earners as the real agenda. I note that they enshrined future spending in the current period. I recognise that future tax cuts are legislated in with other tax cuts that are sweetners to the Australian people. There was considerable rhetoric from Scott Morrison which I found a repeated mantra of caring for the people. I do not feel there is any care for the people. I do not say this as criticism I realise that those on higher incomes do not have the experience of poverty or hardship and really do not connect to people who may eek out a living from day to day. I have been in positions where my needs were met and I didn’t connect either. It is due to lifestyle differences and who is deemed as important in respect of re-election.

I am currently homeless and have to make wise choices to survive. Tax cuts do not affect those who are homeless or on lower incomes (under $20,000) where $500 would make an enormous difference. This I note is ignored as the homeless are not employers or employees, they are a demographic that does not benefit the government therefore there is no benefit that comes their way. This is because the economic mindset dominates amongst those in the Liberal and Labor parties. We live the mantra of economics as unquestioned if we want social stability and prosperity. I question this as I regard the planet as collapsing due to economic activity and the greed it inspires in people which changes our social responsiblity. No longer is egalitarianism valued, we value profit, success, individual gains but not the parity of others in society. I understand this, it has been trained and rewarded into people on a daily basis. The media supports this worldview. Is it true?

It appears to me that the purpose of the tax cuts is to legislate the lower tax rate for higher income earners (longer term) in a subtle way that people do not realise. The real agenda in my view is to bring this down which suggests influence from persons with interests in corporate tax rates. It was interesting to note those on lower incomes received flat rate yearly bonuses which is not a reduction in the tax percentage rate. So tax cuts didn’t happen for those on lower to middle incomes to bring the across the board tax rate down. This article by Treasury shows what they want. I see the sweetners for lower income earners but those between 18,201 and 19,999 do not get any tax break, I found that interesting. I really don’t think tax cuts will generate any economic gains. It seems to be political to me.

https://www.ato.gov.au/General/New-legislation/In-detail/Direct-taxes/Income-tax-for-businesses/Reducing-the-corporate-tax-rate/

Reducing the corporate tax rate

On 1 September 2016, the Government introduced Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 that proposed to reduce the corporate tax rate for corporate entities that are carrying on a business and have an aggregated turnover of less than $25 million for the 2017-18 income year and less than $50 million for the 2018–19 income year – known as base rate entities. This Bill received Royal Assent on 19 May 2017.

Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 was introduced to the House of Representatives on 11 May 2017. If passed, it will progressively reduce the lower corporate tax rate to 25% for all corporate entities by 2026-27.

On 18 October 2017, the Government introduced the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017. If passed, only corporate entities who meet the aggregated turnover threshold and have no more than 80% base rate entity passive income will be eligible for the lower corporate tax rate. The date of effect will be from the 2017–18 income year.

Enterprise Tax Plan 2016

Under the current law the following corporate tax rates apply.

Small business entities changes and timeframes
Year	Aggregated turnover threshold	(SBE) Corporate entities under the aggregated turnover threshold and carrying on a business	All other corporate entities
2015–16	$2m	28.5%	30.0%
2016–17	$10m	27.5%	30.0%

Base rate entities changes and timeframes
Year	Aggregated turnover threshold	(BRE) Corporate entities under the aggregated turnover threshold	All other corporate entities
2017–18	$25m	27.5%	30.0%
2018–19	$50m	27.5%	30.0%
2019–20	$50m	27.5%	30.0%

The maximum franking credit that can be allocated to a frankable distribution paid by a corporate entity will be based on their applicable corporate tax rate for imputation purposes.

More information

Allocating franking credits

Enterprise Tax Plan No.2 2017

The Government introduced a second Bill that progressively extends the lower corporate tax rate to all corporate entities. The table below outlines the proposed changes and timeframes. This law has not yet passed.

Proposed changes and timeframes
Year	Aggregated annual turnover threshold ($m)	Entities under the threshold (base rate entities up to 2022–23)	All other corporate tax entities
2019–20	$100m	27.5%	30.0%
2020–21	$250m	27.5%	30.0%
2021–22	$500m	27.5%	30.0%
2022–23	$1b	27.5%	30.0%
2023–24	No threshold	27.5%	27.5%
2024–25	No threshold	27.0%	27.0%
2025–26	No threshold	26.0%	26.0%
2026–27	No threshold	25.0%	25.0%

Proposed amendment to limit the entities subject to the lower corporate tax rate

Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 proposes to amend the law to limit the lower corporate tax rate to base rate entities with no more than 80% base rate entity passive income from 2017–18 to 2023–24. This law has not yet passed.

Under the proposed law, a corporate entity is a base rate entity, and will receive the lower corporate tax rate from the 2017–18 income year, if they:

have an aggregated turnover less than the relevant threshold
have no more than 80% base rate entity passive income. This income includes:
- dividends other than non-portfolio dividends
- franking credits on such dividends
- non-share dividends
- interest income (some exceptions apply)
- royalties and rent
- gains on qualifying securities
- net capital gains
- income from trusts or partnerships, to the extent it is referable (either directly or indirectly) to an amount that is otherwise base rate entity passive income.

Administrative treatment

In the event that the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 and the Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 does not pass, the existing law will continue to apply, as described below.

2016-17 corporate tax rate

Companies should lodge their tax returns under the existing law. To qualify for the lower 27.5% tax rate in the 2016–17 income year a company must meet the small business entity definition which requires them to:

have an aggregated turnover of less than $10 million, and
be carrying on a business.

2017-18 corporate tax rate

Companies should prepare their 2017-18 income tax returns under the existing law. To qualify for the lower 27.5% tax rate in the 2017-18 income year, a company must meet the existing base rate entity definition which requires them to:

have an aggregated turnover of less than $25 million, and
be carrying on a business.

If there are changes to this law (as proposed in the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017), companies may need to amend their 2017-18 company tax returns.

Franking issues

The maximum franking credit that can be allocated to a distribution for the 2016-17 and 2017-18 income years is based on a corporate tax entity’s applicable corporate tax rate for imputation purposes.

Carrying on a business

The ATO has issued a draft Taxation Ruling on when a company carries on a business.

Early consultation on the Ruling has highlighted a question about the provision around which the advice should be framed. The draft Taxation Ruling addresses whether a company is carrying on a business for the purpose of identifying whether it is a base rate entity in section 23AA of the Income Tax Rates Act 1986 (ITRA 1986). This is relevant for determining whether it is subject to the 27.5% or 30% corporate tax rate in the 2017/18 and later income years. The reasoning expressed in the Ruling is, however, equally applicable to determining whether a company is a small business entity within the meaning of section 23 of the ITRA 1986 and section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2015/16 and 2016/17 income years and therefore which rate is applicable to it in those income years.

In light of this and the proposed changes to the law, the Commissioner is proposing to finalise the draft Ruling in relation to section 23 of the ITRA 1986 and 328-110 of the ITAA 1997, rather than section 23AA of the ITRA 1986 as it is presently drafted.

Compliance approach

We understand there has been some uncertainty about what rate to frank distributions and the company tax rate. The Commissioner will adopt a facilitative approach to compliance in relation to the application of the carrying on a business test. This means that the Commissioner will not allocate compliance resources specifically to conduct reviews of whether corporate tax entities have applied the correct rate of tax or franked at the correct rate in the 2015-16 and 2016-17 income years.

More information

Legislation and supporting material

The Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017External Link was introduced to House of Representatives on 18 October 2017 and is currently before the Senate.

Treasury Laws Amendment (Enterprise Tax Plan) Act 2017External Link received Royal Assent on 19 May 2017.

Treasury Laws Amendment (Enterprise Tax Plan No.2) Bill 2017External Link was introduced to the House of Representatives on 11 May 2017 and is currently before the Senate.