Company Tax Down To 25%

It seems everyone (including tax professionals) are still quoting 30% as the company tax rate when a company eanring rent and or dividens will only pay 25%

Base rate entity passive income is:

• corporate distributions and franking credits on these distributions
• royalties and rent
• interest income (some exceptions apply)
• gains on qualifying securities
• a net capital gain
• an amount included in the assessable income of a partner in a partnership or a beneficiary of a trust, to the extent it is traceable (either directly or indirectly) to an amount that is otherwise base rate entity passive income.

Changes to company tax rates

This is a significant difference in structuring investment ownership for the long term.
And with lots of talk about land tax increases, removal of 50% CGT and removal or compartimentalisation of neg gearing, Pty Ltd companies become a much more useful for long term asset ownership, management and passing on assets

 

Very good news indeed

 

Here is the NSW gov submission to the Houseing Affordability Enquiry.
https://www.aph.gov.au/DocumentStore.ashx?id=1ebbc081-278b-47d9-8489-0ce8f1926ef2&subId=715503

They want to replace stam duty with land tax and remove the 50% CGT exemption which they claim " skews the incentives towards the purchases of properties for investment purposes".

The NSW liberal party thinks that if investors pay more tax when they sell, houses will be more affordable.

 

A bucket company for a discretionary trust is taxed at 25%?

 

The ATO does not distinguish a "bucket company".
What matters is an 80% threshold of income earnt provenance

 

One issue for a company beneficiary is receipt of CGT amounts. No discount. However many disc trusts have ability to stream CGT amounts so even if a CGT amount is distributed to a high income earner the marginal rate of tax that applies is 24.5% which is just a little less than the company rate of 25% - 30%

 

The prevailing view by many levels of Govt is that the CGT incentives skew outcomes so tax benefits are provided to investors yet lower income and buyers of property find larger barriers to entry to buy property. Thus entry to the property market is less affordable.

I believe it is inevitable that SOME changes to the 50% CGT discount will occur in the future. Abolition ? No. However some changes to the rate and which assets are eligible could occur. And a lifetime limit even. Ironically one of the schemes introduced to encourage affordable housing offers a 60% CGT discount.

 

It depends on the income received. If your bucket company income is more than 80% 'base rate entity passive income', (rent, interest, dividends) then the company will be taxed at 30%.

The distribution from a trust takes the character of the income in that trust.

EDIT: This is a basic answer, there are dividends and interest that would potentially qualify as 'non-passive income'.

The other thing to remember is that if your company is taxed at 25%, it can only frank dividends paid out to shareholders at 25% also.

 

why would a company receiving only rent be taxed at 25%. more than 80% would be base rate entity passive income.

 

Not sure what you mean
BREPI has to be 80% or more for the tax rate to be lower.
Trust distributions are also BREPI.

 

think you have read it wrong. BREPI must be 80% or less for the lower company tax rate to apply.

"it has 80% or less of their assessable income in that income year that is base rate entity passive income"

the ato example on that page highlights that

Example: not a base rate entity because passive income is too high

Best Equity Ltd is a listed investment company which invests in Australian shares.

In the 2020–21 income year, Best Equity Pty Ltd has an aggregated turnover under the $50 million aggregated turnover threshold. Its assessable income is $5 million, comprising:

$1 million of interest income
$4 million in dividends.

100% of Best Equity Ltd's assessable income is base rate entity passive income. As a result, they are not a base rate entity for the 2020–21 income year and the 30% company tax rate applies.

 

So if a company makes160k from rent/divs/dist it must have at least 40k operating income non BREPI.
If by "income" that means taxable income and not "net profit" it's still easily achievable.

 

yes a little bit of planning can achieve that objective

 

I got a little excited and frazzled as this means 5% tax than I thought for 2021-22 distributions.
Good thing is it still does without any planning or adjustments.

 

Be wary of Part IVA. Accessing the 25% tax rate v 30% is a tax benefit. Arrangements which suddenly occur may be dubious.

 

It is common for many bucket companies to pay tax at 25% if they are receiving base rate income.

And it is common for bucket companies to invest their distributed income into passive investments.

Currently the law does not have tow rates for the one company - one rate for base rate income and one for passive income. So it is common that passive income is taxed at 25% as a side effect.

The lower tax rate effectively unwinds if you start paying dividends as the bucket company has a lower tax rate. This could change however if the bucket company stopped receiving base rate income - except it would have a shortfall of cranking credits to pass on to shareholders.

 

If a company's primary activity is trading not investing, would the company qualify for the 25% rate?
i.e. the income is not passive?
Does trading income count as BREPI?
What is the test to prove this, eg number of trades per month, number of hours actively spent etc?

 

I'd asssume the word "trading" implies that it's not BREPI which is passive.

 

Best way if unsure is tax advice. The ATO views are published and available to read. Certain TYPES of income earned by the entity are BREPI and others may, or may not, be. There is no need to consider the examples you indicate. The income and how it is earned will be the relevant factor. Some look through applies.

 

This is nothing but a blatant attack on retirees who rely on franking credits! Slashing returns by 5%! John from Portsea might have to sell his second boat!

How is this not front page news?? Jim Chalmers should start organising his roadshow.