Company Tax Rate reduction and Franking Credits
The company tax rate is on the way down to 25%. It is important to think through how this may affect your franking credits.
From 1 July 2021, the company tax rate for base rate entities will reduce to 25%.
|2018-19 and 2019-20||2020-21||2021-22|
|Base rate entities*||27.5%||26%||25%|
|Other corporate tax entities||30%||30%||30%|
|*aggregated turnover less than $50m and no more than 80% of the company’s assessable income is base rate entity passive income.|
Utilising franking credits
The reduction in the company tax rate will also change the maximum franking rate that applies to dividends paid by base rate entities (BRE). The way the rules normally work is that if the company was classified as a base rate entity and was taxed at the lower corporate tax rate in the previous year then a lower maximum franking rate will apply to dividends paid in the current year. For example, the maximum franking rate for a BRE that pays a franked dividend in the 2021 year is 26%. However, in 2022, the maximum franking rate will be 25%.
Some companies may have franking account balances that have accumulated over time and will reflect prior company tax rates. It is important to consider how these credits can be utilised in an efficient manner. One strategy could be to bring forward the payment of dividends to utilise the current 26% franking rate before the company tax rate reduces to 25% if the cashflow of the company allows for it.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, crypto and entrepreneurs.