Table of contents
Introduction
In Australia, the term "base rate entity" refers to a company that qualifies for a lower corporate tax rate.
A base rate entity in Australia is defined under s 23AA of the Income Tax Rates Act 1986. An entity qualifies as a base rate entity for a particular income year if it meets both of the following conditions:
- No more than 80% of its assessable income for the year is base rate entity passive income (BREPI).
- Its aggregated turnover for the year is less than $50 million (for the 2018–19 and later income years; previously $25 million for 2017–18).
Entities that qualify as base rate entities are eligible for the lower corporate tax rate of 25%, rather than 30%, for that income year. The test is applied annually, based on the actual aggregated turnover for the year and the proportion of BREPI in assessable income.
Base rate entity passive income (BREPI)
Base rate entity passive income (BREPI) is a specific category of assessable income defined under s 23AB of the Income Tax Rates Act. It includes the following types of income:
- distributions by other corporate tax entities (excluding non-portfolio dividends) and any franking credits attached to those distributions
- non-share dividends by companies
- interest (or payments in the nature of interest), royalties, and rent
- gains on qualifying securities (as defined in Div 16E of the Income Tax Assessment Act 1936)
- net capital gains, and
- amounts included in the assessable income of a partner in a partnership or a beneficiary of a trust, to the extent that the amount is referable (directly or indirectly) to another amount that is BREPI under the above categories.
Certain financial institutions and entities in the business of providing finance may exclude interest income from their calculation of BREPI.
Law Companion Ruling LCR 2019/5 provides guidance on the operation of the base rate entity test and makes the following points:
- Interest means “the return, consideration, or compensation for the use or retention by one person of a sum of money belonging to, or owed to, another, and that interest must be referable to a principal”. Whether a payment has this character turns on its substance, no matter how it is calculated.
- Rent means “the consideration payable by a tenant to a landlord for the exclusive possession and use of land or premises”. The Commissioner’s view and examples on when consideration paid for the use of land or premises will be rent are set out in Taxation Determination TD 2006/78.
The purpose of identifying BREPI is to determine whether a company qualifies as a base rate entity and is therefore eligible for the lower corporate tax rate. If more than 80% of a company's assessable income is BREPI, it will not qualify as a base rate entity for that income year.
Base rate entity tax rate
For the 2021–22 and later income years, the base rate entity tax rate is 25%, compared to the general company tax rate of 30%.
Worked example: Base rate entity; BREPI and impact on company tax rate and corporate tax rate for imputation purposes
Issue
Woodcraft Pty Ltd undertakes a business of manufacturing furniture from its premises in Sydney. Over the years, the company has invested surplus profits from its trading business into the acquisition of several substantial commercial rental properties. During the year ended 30 June 2025, the company disposed of one commercial property, making a net capital gain of $23 million.
During the year ended 30 June 2025, the company’s turnover from its furniture manufacturing business was $7 million. The company earned rental income from its portfolio of properties amounting to $5 million, earned interest on surplus cash invested at the bank of $1 million and received franked dividends of $1 million (including franking credits) in respect of shares held in several ASX listed companies, in all of which Woodcraft Pty Ltd had a voting interest of less than 10%.
During the year ended 30 June 2026, the company’s turnover from its furniture manufacturing business was $9 million. The company earned rental income from its portfolio of properties amounting to $7 million, earned interest on surplus cash invested at the bank of $2 million and received franked dividends of $1 million (including franking credits) in respect of shares held in several ASX listed companies, in all of which Woodcraft Pty Ltd had a voting interest of less than 10%.
Woodcraft Pty Ltd wishes to pay a dividend to shareholders on 30 June 2026.
What rate of company tax will Woodcraft Pty Ltd pay in the year ended 30 June 2026 and at what rate must it frank the dividend to be paid on 30 June 2026?
Solution
For the 2024–25 and 2025–26 income years, the general company tax rate is 30%, but if the company is a base rate entity the rate is 25% for both 2024–25 and 2025–26 (Income Tax Rates Act s 23).
A company will be a base rate entity for an income year if:
- it had aggregated turnover of less than $50 million, and
- no more than 80% of its assessable income for the income year was BREPI.
Under s 23AB of the Income Tax Rates Act, the following types of income are BREPI:
- a company dividend — other than a non-portfolio dividend (which is a dividend paid to a company where that company has a voting interest of 10% or more in the company paying the dividend)
- a franking credit attached to a dividend other than a non-portfolio dividend
- a non-share dividend
- interest income, royalties and rent
- a gain on qualifying securities (ITAA 1936 Div 16E of Pt III)
- a net capital gain, and
- assessable partnership and trust distributions to the extent that they are referable (either directly or indirectly through one or more interposed partnerships or trust estates) to an amount that is BREPI under any of the above bullet points.
The ATO has issued a Law Companion Ruling LCR 2019/5 which explains the meaning of these terms.
The franking rate to apply to the payment of a franked dividend paid in the 2025–26 income year is the corporate tax rate for imputation purposes. This is defined in s 995-1(1) of the Income Tax Assessment Act 1997 to mean the entity’s corporate tax rate for the income year worked out on the assumption that:
- its aggregated turnover for the current income year (2025–26) is equal to its aggregated turnover for the previous income year (2024–25)
- its BREPI for the current income year is equal to its BREPI for the previous income year, and
- its assessable income for the current income year is equal to its assessable income for the previous income year.
In practice, this means that a company’s maximum franking rate for a franked distribution paid in 2025–26 is 25% if:
- its aggregated turnover for 2024–25 was less than $50 million (the aggregated turnover threshold for 2025–26), and
- its BREPI for 2024–25 was not more than 80% of its assessable income for 2024–25.
Company tax rate for 2025–26
Woodcraft will apply a company tax rate of 25% to its profits for the year ended 30 June 2026.
This is because the company is a base rate entity for the year since both tests are passed:
- the company’s aggregated turnover for the year is less than $50 million (aggregate turnover for the year is $19 million, being the sum of the various sources of income for that year), and
- the company’s BREPI is $10 million for the year, giving a BREPI percentage of 52.6%.
Franking rate for dividend paid in 2025–26
Woodcraft will apply a corporate tax rate for imputation purposes of 30% in respect of the dividend that it wishes to pay on 30 June 2026.
The company satisfies the turnover test, since its aggregate turnover for 2024–25 is $37 million, which is less than the 2025–26 turnover threshold of $50 million.
However, the company fails the BREPI test. The company’s BREPI is $30 million for the year, giving a BREPI percentage of 81% ($30 million divided by $37 million). The net capital gain, the rental income, the bank interest and the gross dividend are all BREPI.
