Many business owners in Australia want to know if they can access the lower 25% company tax rate and reduce their corporate tax bill. This article explains how to check your eligibility, what rules apply, and how careful financial planning can help you pay tax at the most favourable rate. You’ll find practical advice on managing taxable income and making the most of small business concessions.
Why the Lower Company Tax Rate Matters
Australian companies often worry about how much tax they pay each year. The lower company tax rate can make a big difference to your bottom line, especially for small businesses. Understanding how the Australian Taxation Office (ATO) decides who qualifies for the lower rate helps you plan your tax obligations and get the most from your business activities.
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What Is the Lower Company Tax Rate?
The lower company tax rate is a reduced rate for eligible businesses. For the 2024–25 income year, eligible base rate entities can pay company tax at 25% instead of the full company tax rate of 30%. This applies to companies with an aggregated turnover below $50 million and with most of their income coming from active business, not passive sources.
Who Can Benefit?
Most small businesses and many medium-sized businesses can qualify for the lower tax rate. This includes companies with Australian sourced income and those that are not mainly investment companies. The lower rate also means you can keep more of your business profits for growth or reinvestment.
Who Qualifies as a Base Rate Entity?
To be a base rate entity and pay company tax at 25%, your company must pass two tests in the same income year. These tests look at your business’s total turnover and the type of income you earn.
Aggregated Turnover Threshold
Your company’s aggregated turnover must be less than $50 million for the income year. This includes the turnover of any connected entities or affiliates. It’s important to note that some amounts, like Goods and Services Tax (GST) turnover, proceeds from selling business assets, and borrowed funds, are not counted in your aggregated turnover.
Tracking your aggregated turnover correctly helps you know if you can use small business concessions and pay tax at the lower rate.
Passive Income Test
No more than 80% of your assessable income can be passive income. Assessable income includes trading income, rental income, interest, and royalties. Passive income mainly comes from things like interest, dividends, net capital gains (after allowable deductions and small business CGT concessions), and royalties.
If more than 80% of your income is passive, you will not qualify for the lower company tax rate and will pay tax at the standard corporate tax rate of 30%.
How to Calculate Your Tax Position
Working out your tax position involves looking at your taxable income and understanding what counts as assessable income and allowable deductions.
Determining Taxable Income
Taxable income is what’s left after you subtract allowable deductions and capital allowances from your assessable income. This includes operating expenses, superannuation contributions, depreciation, and rollover relief from selling business assets.
Keeping good records of your business activities and GST turnover helps you prepare accurate tax returns and pay the right amount of tax.
Factoring in Capital Gains Tax (CGT)
If you sell business assets or shares in a listed investment company, you may have to pay Capital Gains Tax (CGT). The amount you need to pay depends on your total income and any small business concessions or rollover relief you use.
Using small business entity concessions can help you reduce your CGT bill and keep more of your profits.
Practical Scenarios
Understanding how the rules work in real life can help you plan your business and tax strategies.
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Eligible Manufacturing Company
A manufacturing company with $8 million turnover and $2 million net profit earns 70% of its income from sales and 30% from rental income. Because its turnover is under $50 million and passive income is only 30%, it qualifies for the lower company tax rate of 25%. This means it pays less tax than if it had to pay the full company tax rate.
Ineligible Property Investor
A property company with $10 million turnover earns 85% of its income from rental and capital gains. Even though its turnover is below $50 million, it fails the passive income test because more than 80% of its income is passive. This company must pay tax at the standard corporate tax rate of 30%, which increases its corporate tax bill.
Tips for Careful Financial Planning
Good planning can help you make the most of the lower company tax rate and other tax benefits.
Review Your Business Structure
Make sure your business structure—such as being a resident company, non-resident company, or sole trader—suits your business activities. The right structure can help you pay less tax and take advantage of small business concessions.
Manage Passive Income
Try to limit your passive income, such as rental income or interest, and focus on active business activities. This helps you qualify for the lower company tax rate and reduces your tax obligations.
Use Small Business Concessions
Take advantage of CGT concessions, capital allowances, and rollover relief when selling business assets. These can help you pay less capital gains tax and keep more of your profits.
Keep Good Records
Good record-keeping is essential for preparing accurate tax returns and meeting your tax obligations. Keep track of your income years, GST turnover, and payroll tax to avoid mistakes and penalties.
Get Professional Advice
Registered tax agents can help you understand the rules, prepare your tax returns, and make the most of tax planning opportunities. They can also help you avoid issues like double taxation or domestic minimum tax.
Conclusion
Qualifying for the lower company tax rate depends on keeping your aggregated turnover under $50 million and ensuring passive income does not exceed 80% of your assessable income. By understanding these rules and using small business concessions, you can reduce your corporate tax bill and support your business’s growth.
Ready to see if your business is eligible for the lower tax rate? Contact ACT Tax Group for clear, friendly advice and help with your tax planning and tax obligations. Could a lower tax rate help your business achieve its goals this year?
