If you own a business and your turnover has decreased since Covid or for any other reason, you may be able to make a tax saving since company tax rates are going down and you may now be eligible for the lower tax rate.
The company tax rate has been steadily reducing from 30% to align with the lower rates overseas. This financial year, the rate has reduced to 26% and will reduce further to 25% from 1 July 2021. The company tax rate reduction applies to companies with a turnover of less than $50 million in turnover but you’ll see from in the table below, the turnover threshold has been progressively increasing from $2 million.
Let’s use Joe Mortar who owns a construction company as an example. Joe had a turnover of $65 million in FY20 but his business was severely impacted by Covid and he expects his turnover for FY21 to be $45 million, so the lower company tax rate will apply. While this may be a positive for Joe as the company will pay less tax at the lower rate, it means the dividends the company pays in FY22 will be franked at the lower company tax rate, even if the company turnover bounces back to pre–Covid levels of $65 million. This may impact the top up tax paid by the shareholders of the company in later years.
^Based on turnover and eligibility for each respective year.
Accessing the lower company tax rate may not be a simple exercise depending on the nature of your company’s business and if you have related entities that also need to be included in the turnover calculation. It’s not simply a matter of taking a look at the sales from the company profit and loss and if it’s less than $50 million, assuming the lower company tax rate applies. You will need to know and understand your group structure as well as the type of income earned, as companies with certain types of passive income will be ineligible for the lower company tax rate.
And remember, it’s not a choice to apply the lower tax rate so it’s important to get advice on what’s included and what’s excluded because it not only impacts the company rate of tax, but also the rate your company pays in franked dividends.
If you are not sure if you’re eligible for the lower tax rate, contact our Business Tax Consultant team.
Stay tuned for our next blog on personal tax rates coming soon.