Contents
- What is a Base Rate Entity?
- Base Rate Entity Passive Income
What is a Base Rate Entity?
Base rate entities are subject to a reduced tax rate of 25%. This rate represents a 5% reduction compared to the standard company tax rate of 30%.
To qualify as a base rate entity a company must meet two criteria. First, its aggregated turnover for the income year must be below the specified threshold of $50 million. Second, the company must derive no more than 80% of its assessable income from base rate entity passive sources in that income year.
Determining aggregated turnover involves considering all the income generated by the business. It includes not only the company’s annual turnover but also the turnovers of any related or affiliated entities, both domestically and internationally. Thus, it’s the total revenue generated by business and its connected entities over the course of a year.
Base Rate Entity Passive Income
After determining the company’s total income, the next step is to calculate its base rate entity passive income. Base rate entity passive income includes various sources:
Interest Income
Interest income earned by a business is generally considered passive in Australia‘s economic context. However, there are exceptions to this categorisation. For example, if interest income is derived by a financial institution, a registered body providing finance, or businesses holding Australian credit or financial services licences, it may not be classified as passive.
Rent
Rent refers to payments made by a tenant to a landlord for the use of land or property. It constitutes passive income for the recipient, reflecting a regular stream of revenue without direct involvement in active business operations.
Royalty
The Australian royalty definition, as expanded by the LCR (Law Companion Ruling), includes payments for the use of industrial, commercial, or scientific equipment. This extension broadens the scope of royalty income, including specific payments related to the utilisation of such assets.
Trust and Partnerships
Income derived from trusts or partnerships is considered passive to the extent that it remains passive in the hands of the trustee or partner. However, certain exceptions apply. For instance, if a franked dividend is paid to a company holding at least 10% of voting power in the paying entity, it is classified as a non portfolio dividend. Additionally, dividends from wholly owned subsidiary companies within a group do not constitute base rate entity passive income.
Net Capital Gain
The net capital gains value, as per the LCR, is utilised in calculating the passive income threshold. This calculation, conducted under section 102–5 of the ITAA 1997, takes into account any capital losses and small business concessions, thereby determining the net capital gain.
Non Share Dividends
Non share dividends, defined in section 974-120 of the ITAA 1997, represent returns on non share equity. These dividends are distinct from traditional share dividends and contribute to the passive income assessment for tax purposes.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.