Corporate Tax Deduction - Godbee Favero

The federal government has enacted legislation that implements a series of corporate tax reduction from the 2016-17 years. There is a plan to continue the decreases in the 2026/27 income years.  The governments tax reduction plan is shown below:

Income year Annual aggregated turnover threshold Company
tax rate (%)
2016-17 $10 million 27.5
2017-18 $25 million 27.5
2018-19 $50 million 27.5
2024-25 $50 million 27
2025-26 $50 million 26
2026-27 and
later income years
$50 million 25

While not all these tax reductions have been passed into legislation, we do know that for the current tax year (2017-18) the tax rate for corporations with a turnover of under $25,000,000 will be 27.50% (assuming they satisfy certain conditions).

On the surface, the new corporate tax reduction this seems like good news. However, consideration needs to be given to the taxation of dividends paid out to the shareholders.

Where a company has paid tax at 30% in previous years and then falls into the lower tax rate regime this can have an impact on the level of franking credits that can be attached to dividends paid.

The overall impact of this reduction is that dividends paid to shareholders can only have franking credits attached to them at the rate of 27.5%.  This will result in the shareholders potentially paying additional tax on dividends where their marginal rates are higher than the new company tax rate of 27.50%.

The table below provides an example of the potential impact of the reduction in the corporate tax rate on franked distributions.

Retained earnings before change Franking account balance before change 100% franked distribution at the lower rate (27.5%) Loss of potential franking credits (additional tax payable)
700,000 300,000 265,517 34,483
2,000,000 857,143 758,621 98,522
5,000,000 10,714,286 9,482,759 246,305

As we approach the end of the financial year it is vitally important that you undertake some tax planning. If you have a corporate structure, getting the right advice can minimise any negative impact of these changes.  Please feel free to contact our office to book a meeting to discuss your options in more detail.

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