Australian corporate tax rate

The Australian company tax rate has varied over time. It has been a flat rate and reached its peak of 49%. Before 1987, Australia had the classical dividend taxation system, whereby a company's profit would be taxed at the company tax rate and a shareholder would be taxed on a dividend received, giving raise to what is described as double taxation. In 1987, the Australian dividend imputation system was introduced to stop the double taxation,[1] and to create a "level playing field". The company tax rate was reduced to 39% in 1988 and 33% in 1993, and increased again in 1995 to 36%, to be reduced to 34% in 2000 and 30% in 2001.[2]

From 2015/16, designated "small business entities" with an aggregated annual turnover threshold of less than $2 million were eligible for a lower tax rate of 28.5%. Since 1 July 2016, small business entities with aggregated annual turnover of less than $10 million have had a reduced company tax rate of 27.5%. Additionally, the Australian Government announced that from 2017/18, corporate entities eligible for the lower tax rate will be known as "base rate entities". The small business definition will remain at $10 million from 2017/18 onwards, however the base rate entity threshold (the aggregated annual turnover threshold under which entities will be eligible to pay a lower tax rate) will continue to rise.[3]

Company Tax Rate Period Notes
45% 1973 – 1979
46% 1979 – 1986
49% 1986 – 1988 The classical system of company taxation
replaced by dividend imputation in 1987
39% 1988 – 1993
33% 1993 – 1995
36% 1995 – 2000 Accelerated depreciation removed in 1999
34% 2000 – 2001 Refundable imputation credits introduced in 2000
30% 2001 – Present

Dividend imputationEdit

Australia introduced a dividend imputation system in 1987, making the company tax rate less relevant, especially on company profits distributed to Australian-resident shareholders in the form of franked dividends.

Australian companies that have paid Australian company tax can declare how much of the tax paid is to be imputed or associated with any dividend it pays. Dividends with the maximum imputed tax amount is called a franked dividend, while any other dividend is unfranked. Australian-resident shareholders who receive franked dividends from Australian companies would declare both the dividends and the imputation credits on their tax returns, but are entitled to claim back a tax credit (called a franking credit) on those imputed tax credits. The franking credits associated with such dividends are a tax credit against the shareholder's tax liability. Initially, in 1987, excess franking credits over the tax liability were lost, but since 2000 such excess credits have been refundable.[4] Effectively, the Australian shareholder receives a reimbursement of the company tax paid, and the company profit is taxed at the shareholders' marginal tax rates. Company profits not distributed are taxed at the company tax rate, until such retained profits are distributed.

Non-resident shareholders are not entitled to claim a tax credit or refund of imputation credits. Unfranked dividends received by non-residents are subject to a withholding tax, which does not apply to franked dividends.

Proposed company tax cutsEdit

In the May 2016 budget, the Turnbull government outlined company tax cuts. The small to medium business tax rate would be lowered by 1% to 27.5%, effective 1 July 2016.[5][6] The turnover threshold in which small businesses would be eligible for this lower tax rate would raise from $2 million to $10 million, with the expectation that it would be raised again to $25 million in 2017–18, $50 million in 2018–19, and eventually $100 million in 2019–20.[7][8] It is expected this tax cut will affect over 870,000 businesses, employing 3.4 million workers.[9] Over 6,000 Sole traders, employing 1.5 million workers, will also receive a lower tax cut of 2.5% to 26.0%, subject to the same turnover threshold eligibility as small businesses and along with the same increase in turnover threshold over time.[5] The unincorporated small business tax discount will also be increased by 3%, up to a fixed rate of 8%,[10] with the turnover threshold being increased to $5 million. After 2016–17, it is expected that the discount for unincorporated small businesses will increase to 16% by stages, before the 2026-27 financial year.[5] In the forecast for the budget, Big businesses will receive a 5% cut to the corporate income tax rate, down to the OECD average of 25%, within a decade; the first reduction in the corporate tax rate in 15 years.[11] While the rate will stay fixed at 30% in the meantime, the Turnbull Government plans to reduce it to a rate equal to the small and medium business tax rate of 27.5% in 2023–24, before being reduced to 27% in 2024–25, 26% in 2025–26, and eventually a fixed rate of 25% in 2026–27.[11]

As at May 2018, the government had legislated the first phase of the plan, giving tax cuts to companies with turnover of up to $50 million at a cost of $29.8 billion over the first decade. The second phase, costing another $35.6 billion over the same period,[12] has already been blocked in the Senate.[13]

ReferencesEdit

  1. ^ Act No. 59 of 1987
  2. ^ "Fact check: Did Labor previously make the same arguments as the Government on company tax?". Australian Broadcasting Corporation. 29 June 2016.
  3. ^ "Reducing the corporate tax rate". Australian Taxation Office. 4 July 2017.
  4. ^ "Refunding excess franking credits – individuals". Australian Taxation Office. 28 June 2017.
  5. ^ a b c Khadem, Nassim (3 May 2016). "Federal Budget 2016: Tax cuts for small businesses, sole traders". The Sydney Morning Herald. Fairfax Media. Retrieved 6 May 2016.
  6. ^ Mather, Joanna; Anderson, Fleur (3 May 2016). "Budget 2016: Small business cleans up $5.3 billion tax cuts". The Australian Financial Review. Retrieved 6 May 2016.
  7. ^ Janda, Michael (3 May 2016). "Budget extends company tax breaks, multinational crackdown". ABC News Australia. Australian Broadcasting Corporation. Retrieved 6 May 2016.
  8. ^ Kelly, Joe (4 May 2016). "Up to 60,000 to get rate relief". The Australian. News Corp Australia. Retrieved 6 May 2016.
  9. ^ Sinclair, Hannah (3 May 2016). "Budget 2016: Small business tax cut to encourage 'investment and enterprise'". SBS World News. Special Broadcasting Service. Retrieved 6 May 2016.
  10. ^ Sexton, Jennifer (4 May 2016). "Budget 2016: Small business cleans up $5.3 billion tax cuts". The Daily Telegraph. News Corp Australia. Retrieved 6 May 2016.
  11. ^ a b Hutchens, Gareth (3 May 2016). "Corporate tax cuts to cost budget $5.3bn over four years". The Guardian. Guardian Media Group. Retrieved 6 May 2016.
  12. ^ https://www.theage.com.au/politics/federal/nervous-coalition-mps-privately-consider-the-pros-and-cons-of-shelving-their-company-tax-cut-policy-20180522-p4zgv0.html
  13. ^ Malcolm Turnbull has just been given the perfect excuse to shelve his company tax cuts