A Base Rate Entity (BRE) is a classification under Australian tax law that determines the corporate tax rate a company is subject to, whether 25% or 30%. Introduced to provide tax relief to small and medium-sized businesses, the concept of a BRE is crucial for understanding how Australian companies are taxed. This classification primarily hinges on two criteria: the aggregated turnover of the company and the nature of its income. Note that it’s best to contact your tax accountant Melbourne if you need clarification with anything in this blog.
Key Criteria for a Base Rate Entity
To qualify as a Base Rate Entity for a specific income year, a company must meet both of the following conditions:
- Aggregated Turnover Threshold:
- The company’s aggregated turnover must be less than $50 million for the income year.
- Aggregated turnover includes:
- The company’s annual turnover.
- The turnover of any connected entities e.g. Company A sells air conditioners while company B repairs air conditioners to customers who have bought from Company A. If Company A and B have the same owners, then they would be connected entities.
- The turnover of any affiliated entities. The same example as above except Company A is owned by the husband and Company B by the wife. In this case, Company A and B are affiliated. We understand that this might be a difficult concept so please do not hesitate to contact your tax accountant Melbourne with any questions.
2. Base Rate Entity Passive Income Threshold:
- The company must derive no more than 80% of its assessable income from passive sources.
- Passive income includes:
- Interest.
- Dividends (unless franked).
- Royalties.
- Rent.
- Gains on capital investments.
Base Rate Entity Tax Rates
The corporate tax rate applicable to a Base Rate Entity is lower than the standard corporate tax rate. As of recent tax years:
- Base Rate Entity Tax Rate: 25%.
- Standard Corporate Tax Rate: 30%.
This reduced rate is aimed at encouraging business reinvestment and growth among smaller businesses.
Examples of BRE Eligibility
- Example 1: A small marketing agency with an aggregated turnover of $3 million and income primarily from service fees would likely qualify as a Base Rate Entity and be taxed at the lower rate of 25%.
- Example 2: A property investment company with $10 million in turnover, but 85% of its income (i.e. $8.5 million) is derived from rental income. In this case, the property investment company would not qualify for the lower tax rate and be taxed at 30%.
Why Does BRE Status Matter?
Understanding whether your company qualifies as a Base Rate Entity is essential for:
- Tax Planning: Ensuring accurate tax calculations and identifying opportunities for tax savings. Your tax accountant Melbourne will be able to provide strategies depending on your BRE status.
- Compliance: Avoiding penalties from lodging incorrect tax returns.
- Strategic Growth: Utilizing tax savings to reinvest in the business.
How to Determine BRE Status
To determine if your company qualifies as a Base Rate Entity:
- Calculate your aggregated turnover.
- Assess the proportion of passive income relative to total assessable income. Your accountant Melbourne can help you with this calculation.
- Review the eligibility criteria annually, as changes in turnover or income composition may affect your status. This means that you maybe paying 25% in year 1 and 30% in year 2. Again, best to speak to your accountant Melbourne who will be able to help with these calculations.
Common Misconceptions
- Only Small Companies Qualify: Not true. Medium and large sized businesses with turnovers up to $50 million may also qualify, provided they meet the income composition criteria (i.e .not more than 80% of income is passive).
- All Passive Income Disqualifies: Passive income only disqualifies a company if it exceeds 80% of total assessable income. For example, if total turnover of your company is $1 million, made up of $700k of interest and dividend income and $300k of sales to customers, then your company would be a BRE as passive income is only 70% in this example (i.e. not more than 80%).
- BRE Status Is Permanent: In actual fact, BRE status is reviewed each income year and can change based on turnover and income sources.
Conclusion :
The Base Rate Entity classification is an essential component of the Australian corporate tax system, designed to support smaller businesses by providing a reduced tax rate. By understanding the criteria and implications of BRE status, business owners can ensure compliance and optimize their tax strategies. If you’re unsure whether your company qualifies, it’s wise to consult with a tax accountant Melbourne. Please call us at your earliest convenience.
