Federal Budget 2020-21 | What isn’t here for our clients?
Two-tier tax rates
There is still no movement in Australia’s two-tier corporate income tax systems. When the Government first began its program of corporate income tax reductions, the split rate system was a way to secure opposition support, with the income tax rate cut for companies with a smaller turnover. It was intended that ultimately all companies would have a single corporate income tax rate. However, this never eventuated.
Now, with a Base Rate Entity (BRE) taxed at 26% (25% from 1 July 2021) and non-BRE’s remaining taxable at 30% there are a number of adverse income tax implications, including:
- Administrative and compliance costs for companies to determine where they are a BRE or not (which is an annual test);
- Uncompetitive international corporate income tax rate for small entities that do not meet the definition of a BRE;
- Trapping of franking credits in a company when they move from the 30% tax rate to a BRE tax rate; and
- Adverse tax outcomes where a non-BRE pays a fully franked (i.e. 30% tax rate) dividend to a BRE parent that can only frank dividends at 26% (or 25% from 1 July 2021).
Division 7A remains a needlessly complex set of provisions. Updating and simplifying Division 7A has been floated in Budget announcements going back to the 2016/17 budget. These changes were intended to apply from 1 July 2019 however that timeframe was pushed back, initially to 1 July 2020 and now is on hold until legislation is presented to Parliament and passed.
This is a missed opportunity to simplify and modernize Division 7A which is long overdue. It seems there is little appetite for the Government to pursue these changes.
In the 2016/17 Budget the Government announced a framework for a new Corporate Collective Investment Vehicle (CCIV). This was intended to develop a new type of entity focused on passive investment with flow through taxation for investors, similar to a managed investment trust. Despite extensive consultation, this announcement is yet to be introduced through legislation. The new CCIV is an important measure in improving Australia’s international competitiveness for investment entities and will provide Australian businesses with further flexibility around investment vehicles.
Co-written by Ally Evans & Chelsea Fennell
The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.