Impact of the change in the Company Tax Rate
The retrospective change in the small company tax rate is starting to register for companies across the country. The tax rate change came at a significantly late point in the 2016/17 tax year and as such may have caught some taxpayers by surprise.
The change in small business company tax rate is part of the Federal Government’s plan to reduce the corporate tax rate for all companies to a rate of 25% by 2026-27. To access the current reduction in corporate tax rate the company must have an aggregated turnover of less than $10m. Aggregated turnover is the turnover (i.e. ordinary income) of the entity, its connected entities and its affiliates, so caution needs to be had when determining whether an entity qualifies.
The impact of the change in corporate tax rate will be felt most in the following areas:
Timing or Temporary Differences
Where there are differences between accounting and tax income for a company, a change in tax rate can have a significant impact not only on its tax payable position but also on its assets and liabilities (if deferred tax balances are recognised).
In comparison to the standard position, a temporary or timing difference for taxation purposes generates a permanent difference. This meaning any deductions or taxable income at the rate in the first year will then be assessable or deductible following the rate in year two. As such, electable timing differences (e.g. stock valuations, depreciation methodologies) can be used to great effect.
For any entities recording deferred tax balances, closing balances for the year ended 30 June 2017 need to reflect that the deferred tax balances will only be recouped at the lower rate of tax.
As a result, an adjustment to these assets or liabilities needs to be reflected as a permanent difference through tax expense.
Another common issue arises in respect of distributions issued early in the 2016–17 year, prior to the rate being changed. Companies often issue dividends early in the new tax year; however, dividend statements need to be reissued to reflect the changes to imputation credits, as a result of the tax rate change, which are attached to the dividends.
This can be achieved by sending a letter or email to shareholders or issuing a revised distribution statement. The changes also need to be reflected in the franking account although there is no recalculation of franking account balances as in prior years.
Should you have any questions as to how the company tax rate affects you please contact us or speak to your ESV engagement partner on 02 9283 1666.