Everything Australian Companies Need to Know About Corporation Tax
15 MayHandling taxes is notoriously complex for Australian businesses. It can be overwhelming for SMEs, especially if you lack a dedicated, in-house accounting team.
But it’s vital to understand relevant tax laws, what your company tax rate is and how to properly report this information. This ensures you stay in the clear with the Australian Tax Office (ATO), while avoiding unnecessary penalties and headaches.
Here’s everything you need to know about corporation tax.
Changes to the Corporate Tax Rate Over the Years
The corporate tax rate has fluctuated over the past 45+ years.
Trading Economics explains, it was at 45% between 1973 - 1979. It jumped up to 46% from 1979 - 1986, and rose again to reach its highest at 49% from 1986 - 1988. It has since dropped considerably.
Here’s a breakdown of what the corporate tax rate has been from the late 80s to today:
- 39% - 1988 - 1993
- 33% - 1993 - 1995
- 36% - 1995 - 2000
- 34% - 2000 - 2001
- 30% - 2001 - present
What Is the Corporate Tax Rate in 2019?
The full company tax rate is 30% and should remain there for the foreseeable future. This applies to companies, corporate unit trusts and public trading trusts.
Today’s companies pay considerably less for corporation tax than organisations in the past. In fact, it’s now 19% lower than it was at its peak between 1986 - 1988. 30% is actually a record low for Australia.
But as Shane Wright of The Sydney Morning Herald reports, Australia’s corporate tax is still one of the highest in the world. As of January 2019, it was the third highest globally, with only Costa Rica and Chile having higher rates.
For comparison, Australia’s prime competitors such as the United States, Britain, New Zealand, Canada and South Korea all had lower rates. The United States, for instance, is currently at 21%.
Base Rate Entities
Not all companies pay a 30% corporate tax rate, however. Those who are classified as base rate entities are eligible for a lower company tax rate of only 27.5%.
The ATO explains, for the 2017 - 18 income year, a base rate entity is a company that both:
- “Has an aggregated turnover less than the aggregated turnover threshold — which is $25 million for the 2017 - 18 income year.
- 80% or less of their assessable income is base rate entity passive income — this replaces the requirement to be carrying on a business.”
Base rate entity passive income can include royalties and rent, corporate distributions, gains on qualifying security and interest income.
The bottom line is that you can expect to pay a 30% corporate tax rate unless you qualify as an eligible base rate entity. In that case, you would only pay 27.5% until 2020. However, that is set to change in the near future.
Upcoming Changes for Base Rate Entities
Initiatives to lower the corporate tax rate will be taken in the near future, meaning corporate tax for base rate entities will drop over the next few years.
Companies who qualify will still pay 27.5% from 2018 - 20, but the aggregated turnover threshold will increase from $25 to $50 million AUD. After that, they’ll pay 26% with an aggregated turnover threshold of $50 million AUD from 2020 - 21. The following year, they’ll only pay 25% with an aggregated turnover threshold of $50 million from 2021 - 22.
In other words, corporation tax is decreasing for base rate entities over the next few years and will drop a total of 2.5% between 2017 - 18 and 2021 - 22.
Correctly Filing Taxes
Besides understanding what your company tax rate is, you need to know the basics of filing.
The Australian Government’s website, Business.gov, explains, “A company business structure is taxed as a separate legal entity that does its own tax return.”
They must lodge an annual company tax return, which includes company income, deductions and the income tax it’s liable to pay. Business.gov also points out companies must lodge their own tax return, and if an associated trust is involved, then they must lodge their own tax return as well.
Note: “As a director, if you draw wages as an employee or receive dividends from the company, you must report this as income when you lodge your own individual return. You may also need to lodge a fringe benefits tax return, if you receive fringe benefits.”
It’s important to get all your ducks in a row to ensure everything is reported properly. It’s also crucial that it’s done on time.
Penalties for Not Lodging on Time
Tax returns for Australian businesses cover the time between 1 July and 30 June and are due by 31 October. Not filing on time is what’s known as a Failure to Lodge (FTL), which can potentially lead to penalties. The cost of the penalties can vary and is primarily determined by the size of your company.
Here’s how that breaks down.
The ATO says, “For a small entity, FTL penalty is calculated at the rate of one penalty unit for each period of 28 days (or part thereof) that the return or statement is overdue, up to a maximum of five penalty units.”
This becomes larger for a medium entity with turnover of more than $1 million and less than $20 million AUD, where the penalty is multiplied by two. And it increases again for a large entity with turnover of $20 million or more, where the penalty is multiplied by five.
So the larger your company, the more severe the penalty.
It should be noted that the ATO is fairly understanding and accommodating when it comes to FTL. Organisations generally aren’t penalised when it’s an isolated incident, and warnings will be given either over the phone or in writing before incurring a penalty.
That said, it’s still extremely important to stay on top of corporation tax and take measures to ensure it’s taken care of by 31 October.
If there’s an issue where you have difficulty meeting the deadline or fulfilling your tax obligations, you should contact the ATO via this link. A registered agent can work with you to figure out a solution.
Retaining Records
There’s one last thing to point about in terms of meeting ATO compliance standards.
You must retain your corporate tax records for five years. This is a required tax law, and the ATO can potentially penalise you for not retaining records for this length of time.
So be sure to keep everything on file so information can be quickly retrieved. Having both physical, paper documents as well as digital versions is ideal.
SME Tax Tips
The information above covers the fundamentals of corporation tax and what you need to know to correctly file your taxes.
Here are some ways to simplify things and streamline the process.
Stay on Top of Records
Keeping organised, accurate records is vitally important. That’s something managing director at Australian Invoice Finance, Greg Charlwood, can’t stress enough.
You need an efficient, well-run filing system that provides you with a detailed snapshot of your company’s earnings at all times. Not only does this save time come when lodging and prevent frustration, it can be a godsend in the event of an ATO audit. It ensures that you’ve always got a paper trail and earnings can be easily traced.
Investing in a comprehensive corporate tax software like ONESOURCE is perfect for SMEs and offers a straightforward, cloud-based solution.
Write Off Bad Debts
Charlwood also mentions it’s a good idea to write off bad debts before 30 June rolls around. If you’ve incurred a bad debt or partial bad debt because of a client failing to pay in full, it can be claimed as a deduction if it was included in your company’s assessable income.
In the event that a client doesn’t pay or doesn’t pay in full, this can help offset your costs.
Deduct Startup Costs
This only applies to newer businesses with a turnover of less than $10 million AUD. But if your company falls into this category, you can claim a tax deduction for certain costs including:
- Accounting and legal advice when setting up your business
- Borrowing fees
- Government fees you paid to register your business
While this may not have a huge impact, it should still be helpful and lower your overall corporation tax.
Staying Compliant and Getting it Right
There’s a lot involved with Australian corporate tax. And it’s easy for SMEs to be confused and overwhelmed sorting through all of the details.
What’s most important is knowing what tax percentage you owe annually, whether you’re eligible for a base rate entity, correctly lodging corporate taxes on time and retaining tax information for five years.
Do that, and you should have a firm grasp on corporation tax, and your company should be in good shape.
What do you find most confusing about corporation tax? Please let us know about your experience, call us on 1300 505 883, or click here for us to get in touch.
Read more