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Company Tax Rate for ‘Small Businesses’ Reduced to 28.5%, But is it All Good News?

Some great news brought in by the Federal Budget to all small businesses, is the decrease of the corporate tax rate from 30% to 28.5% (effective 1 July 2015).  This will apply to all companies that have a turnover of less than $2,000,000.  If your company is one of many businesses that you conduct, it may still be eligible for the reduced company tax rate providing the combined turnover of the group is below the threshold.

Whilst this is a positive change there are some hidden dangers if companies do not manage their franking accounts accordingly.  As a bit of a refresh a ‘franking account’ keeps track of a company’s ‘tax credits’ that can flow through to shareholders who receive dividends.

On the flipside, the change in the corporate tax rate for small businesses can increase your exposure to Franking Deficit Tax (FDT).

FDT occurs when a company pays dividends (with franking credits) that are in excess of those available, or, outside of the prescribed benchmarks.  Whilst this has historically been straightforward to manage, the dual corporate tax rates will now force companies to keep a closer eye on their franking accounts.

Management of a franking account is, therefore, crucial for any business operating through a company, especially if they are a small business.  Rest assured that if we identify any triggers for FDT we will alert you to this along with ways to mitigate your exposure.

To learn more about the computation and implications of the lower tax rate for small businesses and the franking rate, please contact us or refer to the Reference Guide published by the Australian Taxation Office.

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