Understanding Australia’s new company tax rates

Current company tax rates

For the 2024–25 income year, the Australian company tax rates are:

• 30% — the standard company tax rate
• 25% — the lower rate for companies that qualify as a base rate entity (BRE)

There are special rates for superannuation funds, life insurance companies and not-for-profits, but for most trading companies the relevant rate will be 25% or 30%.

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What is a base rate entity?

A company qualifies as a base rate entity if it meets two key tests during the income year:

1. Turnover threshold
   The company’s aggregated turnover must be less than AUD 50 million. Aggregated turnover includes the turnover of connected or affiliated entities, not just the company itself.
2. Passive income test
   No more than 80% of the company’s assessable income can come from base rate entity passive income.

Passive income includes:

• Dividends and franking credits
• Rent and royalties
• Interest income (with limited exceptions)
• Gains on certain securities and net capital gains
• Income flowing through from trusts or partnerships to the extent it is traceable back to passive sources

If either the turnover threshold is exceeded or more than 80% of income is passive, the company must pay the full 30% rate.

How company tax rates have changed

The lower tax rate has reduced over recent years, while the turnover threshold has increased:

The current 25% lower rate is the lowest company tax rate for base rate entities in decades.

Examples

Example 1: Trading income with minimal passive income
Bright Shoes Pty Ltd has aggregated turnover of AUD 10 million and earns almost all income from trading, with AUD 50,000 of bank interest. Passive income is well under 80%. Bright Shoes qualifies as a base rate entity and pays tax at 25%.

Example 2: Trading and rental income
Café Co Pty Ltd has AUD 5 million turnover. It earns AUD 4 million from trading and AUD 1 million from rental income via a trust. Passive income is 20%. This is below the 80% threshold, so the company qualifies for the 25% rate.

Example 3: Passive income company
Invest Pty Ltd earns AUD 2 million in dividends and interest, and no trading income. All income is passive. Even though turnover is below AUD 50 million, more than 80% of income is passive. Invest Pty Ltd pays the full 30% rate.

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What this means for businesses

• Lower tax rate opportunity
  Companies with turnover under AUD 50 million and less than 80% passive income benefit from the lower 25% rate.
• Impact on dividend franking credits
  Companies taxed at 25% can only distribute dividends with franking credits at 25%, not 30%. This can affect shareholder returns.
• Watch your structure
  Businesses close to the AUD 50 million threshold, or with growing passive income, should monitor carefully to avoid unexpectedly moving into the higher tax rate.
• Simpler tests
  In the past, eligibility for the lower rate depended on being a small business entity or carrying on a business. Now, the tests are clearer: turnover and passive income.

Key takeaways

• The full company tax rate is 30%.
• The lower rate of 25% applies to companies that are base rate entities.
• To qualify as a base rate entity, turnover must be under AUD 50 million and no more than 80% of income can be passive.
• Understanding which rate applies affects not just tax bills but also dividend franking credits.