As you are probably aware, company tax rates from 2017 financial year (FY) onwards have changed and there are implications for franking rates as a result. To ensure that you consider these changes and the effect that they may have on your business, we thought that we would bring you further clarification.

In the 2017 FY, the lower company tax rate of 27.5% applied if the Small Business Entity (SBE) was carrying on a business, and the aggregated turnover of the SBE was less than $10M in the 2016 or 2017 financial years. There was also no need to analyse passive versus active income, with passive income relating to income streams such as royalties, interest, rent and dividends, capital gains and trust or partnership income.

The franking percentage in 2017 FY was also limited to 27.5% if the above criteria applied. However, if the company wasn't carrying on a business in the 2017 FY, or the aggregated turnover was $10M or more in the 2016 FY, the franking rate was limited to the higher rate of 30%.

Assuming legislation is passed, the 2018 FY will see some changes to the previous criteria. Under the new rules, a company will not be able to access the lower company tax rate of 27.5% unless its aggregated turnover is less than $25M and no more than 80% of the company's assessable income is from passive income streams. This effectively replaces the 'carrying on a business test' with a passive income test.

The Bill also makes changes to the maximum franking percentage rules for 2018. The franking rate will again be limited to 27.5%, but only if the aggregated turnover was less than $25M in the 2017 FY and 80% or less of turnover was passive. Subsequently, the franking rate will be limited to 30% if the aggregated turnover was $25M or more in the 2017 FY or more than 80% of turnover in the 2017 FY was passive. Additionally, if a company didn't exist in the 2017 FY, the franking rate will be capped at 27.5% in the 2018 FY.

As always, we are only a phone call away on 02 4861 8383, and are more than happy to help you maximise your potential, and that of your business.