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Corporate Tax

Pathway to a lower corporate tax rate

In a move that will be welcomed by the business community, as part of this year’s Federal Budget the Government has set out the path for lowering the corporate tax rate to 25 per cent for all companies over the next 10 years. The corporate tax rate is currently 28.5 per cent for small business entities (broadly, those with annual aggregated turnover of less than $2 million) and 30 per cent for all other companies.  

The rate cut will commence with a reduction for small business companies (being those with annual aggregated turnover of up to $10 million) to 27.5 per cent from the 2016-17 income year. The annual aggregated threshold will then be progressively increased to ultimately have all companies taxed at the rate of 27.5 per cent in the 2023-24 income year.  Refer to the Private Business section for further details of this phasing.  

From the 2024-25 income year the tax rate will be reduced for all companies to 27 per cent and then be reduced progressively by 1 percentage point per year until it reaches 25 per cent in the 2026-27 income year.

These rate reductions will apply to all companies (both resident and non-resident) and to other entities taxed like companies (for example, public trading trusts and limited partnerships). As noted above, it is the Government’s intention to align the small business and general corporate tax rates going forward, which will have the additional benefit of removing the complexity of the current tiered tax rate system which can act as a deterrent to growth. Franking credits will be able to be distributed in line with the rate of tax paid by the company making the distribution.

The Government has indicated that lowering the corporate tax rate is part of its overarching plans to promote economic growth in Australia and encourage investment by making Australia’s corporate tax rate more competitive. At least some part of the 'trade-off' for lowering the corporate tax rate would appear to be a range of new anti-avoidance measures targeting multinational corporations. Refer to the Global Tax section for further details.

At 30 per cent, Australia’s corporate tax rate is well above the 23 per cent average for Organisation of Economic Cooperation and Development (OECD) member states. In the past 15 years, Australia’s headline corporate tax rate has remained constant while there has been a clear global trend to reduce corporate tax rates. As the competition for highly mobile capital increases, a high corporate tax rate can act as a significant roadblock for investment into Australia. It can also impact on domestic investment and reduce the incentive to innovate, and in turn, have the consequences of reducing economic growth, productivity and real-per-person incomes.

PwC supports the lowering of the corporate tax rate. While the Government’s phased-in approach is a sensible means of achieving the benefits of a lower corporate tax rate in Australia having regard to the current Budgetary restraints, this dampens the scale and pace of any economic dividend. The case for lowering the corporate tax rate is set out in detail in out Protecting Our Prosperity publication, A Corporate Rate Reduction: the case for and against.

Tax consolidation

For three years, corporate groups undertaking transactions involving the acquisition or disposal of another entity have had to model the tax consolidation outcomes having regard to the current law as enacted, as well as the proposed laws that were to apply to arrangements commencing on or after 14 May 2013.

Some level of relief will be achieved in respect of the proposed ‘deductible liabilities’ measures, with new rules announced in this year’s Federal Budget applying from 1 July 2016, rather than arrangements commencing on or after 14 May 2013.  The 2013 announcement had been widely criticised as creating a market-distorting tax impost for ordinary corporate mergers & acquisitions.

In a welcome amendment, head companies of consolidated groups will no longer be required to bring to account assessable income amounts corresponding to the deductible liabilities of a joining entity.  Instead, when calculating the allocable cost amount (ACA) of the joining entity, deductible liabilities will be excluded.  As a result, the assets of the acquired entity will have a lower tax cost base which may reduce future tax depreciation deductions. However, in a business which is rich with intangible assets for which there are no tax deductions (e.g. customer relationships and goodwill) this may not have a material tax cost outcome.  The Budget announcement promises the new rules will be much simpler than those previously proposed. This is promising, but may mean that the new rules will apply in a broader range of circumstances, with limited or no carve outs for group formations or certain group restructures.

The current treatment of deferred tax liabilities (DTLs) on entry to, and exit from, a consolidated group gives rise to complex calculations and uncertain outcomes.  This year’s Budget includes an announcement that for transactions commencing after the date the amending legislation is introduced into Parliament, DTLs will be excluded from the ACA entry and exit calculations.  This change will reduce the complexity involved in the joining and leaving process.

The 2014-15 Federal Budget included proposed amendments applicable to accounting liabilities in respect of securitised assets.  Because the liability exists for accounting purposes, but the asset is not recognised for tax purposes, an unintended result could arise when an entity joins or leaves a consolidated or MEC group.  The original proposal, which is to apply to arrangements commencing on or after 7.30pm (AEST) 13 May 2014, only applies where a member of the group is an authorised deposit taking institution (ADI) or a financial entity. The 2016-17 Federal Budget extends this ‘securitisation measure’ to non-financial institutions for arrangements commencing on or after 7.30 pm (AEST) 3 May 2016.

In addition to the above measures, there remain some major tax consolidations amendments that have been announced in previous year’s budgets and are yet to be enacted. These are set out in the table below.

Previously announced measure Date of effect
Non-residents will not be able to buy and sell membership interests between consolidated groups to allow the same ultimate owner ‘to claim double deductions’ through the resetting of the tax cost of the assets without any recognition under the non-resident capital gains tax (CGT) rules (referred to as the ‘churning’ measure) Arrangements that commenced on or after 14 May 2013
Consolidated groups will not be able to access double deductions by shifting the value of assets between entities, i.e. when an encumbered asset, whose market value has been reduced due to the intra-group creation of rights over the encumbered asset, is sold by a consolidated group (referred to as the ‘value shifting’ measure) Arrangements that commenced on or after 14 May 2013
Only net gains and losses on certain intra-group liabilities and assets that are subject to the taxation of financial arrangements (TOFA) regime will be recognised for tax purposes upon exit of a member from a consolidated group (referred to as the ‘TOFA measure’)

Applies from the commencement of the TOFA regime (in most cases, income years commencing on or after 1 July 2010)

Contact us

Tom Seymour

Chief Executive Officer, PwC Australia

Tel: +61 7 3257 8623

Wayne Plummer

Partner, PwC Australia

Tel: +61 (2) 8266 7939

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