What is the company tax rate in Australia?
The company tax rate in Australia is 25% for base rate entities (aggregated turnover under $50 million with no more than 80% passive income) and 30% for all other companies.
Detailed Explanation
Australia operates a two-tiered corporate tax system that distinguishes between small and medium businesses (base rate entities) and larger companies. Understanding which rate applies to your business is essential for tax planning and cash flow forecasting.
The two rates explained
30% — Standard corporate tax rate This applies to any company that does not qualify as a base rate entity. It applies to large companies with aggregated turnover of $50 million or more, and to companies where 80% or more of their income is passive (interest, dividends, rent, royalties, capital gains).
25% — Base rate entity tax rate This applies to companies (Pty Ltds) that meet both of the following conditions: 1. Their aggregated turnover is less than $50 million 2. No more than 80% of their assessable income is base rate entity passive income (BREPI)
Base rate entity passive income includes dividends, interest, rent, royalties, and net capital gains. A company primarily earning from actively running a business will easily satisfy the less-than-80% passive income test.
The 25% rate has been progressively reduced from 30% over recent years, reaching 25% from the 2021-22 income year.
Aggregated turnover: including your associates
Aggregated turnover is not just your company's own revenue. It includes the annual turnovers of any entities that are affiliated with you or connected to you under the tax law. Connected entities include companies where you (or a related entity) own 40% or more of the voting shares. This prevents a large group from splitting into many small companies to access the lower rate.
Company tax vs. personal income tax
Company tax is not the end of the tax story for company directors or shareholders. Profits distributed from a company as dividends typically carry a franking credit reflecting the tax already paid by the company. Shareholders then include the dividend and the franking credit in their personal tax return, and receive a credit for the company tax already paid. This system is called dividend imputation and is designed to prevent double taxation.
Retained earnings vs. dividends
A key planning consideration for owner-managed companies is whether to pay out profits as salary, directors' fees, or dividends. Each has different tax implications: - Salary/wages: Deductible to the company, taxed to the individual at marginal rates, subject to PAYG withholding and superannuation - Dividends: Not deductible to the company, but carry franking credits. The shareholder includes the gross dividend in their tax return and offsets the credit - Retained earnings: Taxed at 25-30% in the company and not immediately subject to personal tax until distributed
Division 7A: loans from your company
If a company director or shareholder takes money from the company — whether as a loan, payment, or debt forgiveness — without proper documentation, Division 7A of the ITAA 1936 may treat the amount as an unfranked dividend, taxable to the recipient at their marginal rate. Director loans must have a written loan agreement, be at the ATO's benchmark interest rate, and be repaid within the required timeframe.
Loss carry-back offset
Base rate entities with losses can apply the loss carry-back offset mechanism, which allows a tax refund for the current year loss based on tax paid in previous years. This provides cash flow relief during downturns.
The small business income tax offset
Sole traders and individuals with business income do not pay company tax — they pay income tax at personal marginal rates. However, they may be eligible for the small business income tax offset (SBITO), which provides a tax offset of up to $1,000 per year for sole traders with annual turnover under $5 million.
PAYG instalments and the company tax
Companies are generally required to pay their tax liability in advance through the PAYG instalment system. Instalments are calculated based on your prior year's tax liability and paid quarterly. At year end, when you lodge your company tax return, the instalments are reconciled against your actual liability and you either pay the balance or receive a refund.
Source: ATO Company tax rates
Real-World Examples
Software startup accessing the 25% rate
A Pty Ltd software company earns $2.1 million in revenue from software subscriptions. Over 95% of income is active business income (subscriptions), well under the 80% passive income threshold. Aggregated turnover is $2.1 million. The company pays 25% on its $600,000 taxable profit, resulting in a tax bill of $150,000.
Property holding company at 30%
A company earns 90% of its income from investment property rents (passive income). Even though its turnover is only $800,000, it fails the passive income test (above 80% BREPI). It pays corporate tax at 30%, and franking credits on any dividends are calculated at the 30% rate.
Common Mistakes to Avoid
- Assuming all small businesses automatically pay 25% — the passive income test can catch investment companies or mixed businesses that fail to qualify as base rate entities.
- Forgetting that aggregated turnover includes connected entities, allowing a business to believe it is under the $50 million threshold when the combined group is not.
- Ignoring Division 7A when taking money from the company as loans without a formal agreement, resulting in unexpected deemed dividend assessments.
- Confusing the company tax rate with the total tax cost — franked dividends create personal tax obligations once profits are distributed to shareholders.
Frequently Asked Questions
Has the company tax rate always been 25% for small companies?
No. The 25% base rate was phased in progressively. It was 30% for all companies until 2015-16, then gradually reduced for small companies over several years, reaching 25% from the 2021-22 income year. Large companies have remained at 30% throughout this period.
What is a franking credit and how does it work?
A franking credit (also called an imputation credit) represents the corporate tax already paid by a company on its profits before distributing a dividend. When a shareholder receives a franked dividend, they include both the cash dividend and the franking credit in their income tax return, and receive a credit for the tax the company already paid. This prevents double taxation of company profits.
What is Division 7A and how do I avoid it?
Division 7A deems certain payments, loans, or debt forgiveness from a private company to its shareholders or associates to be unfranked dividends, subject to personal income tax. To avoid Division 7A treatment on loans, you need a written loan agreement with repayment terms not exceeding 7 years (or 25 years if secured by real property), and you must charge at least the ATO's benchmark interest rate and make minimum annual repayments.
Do I still owe personal tax if my company has already paid 25% tax?
Yes, when you distribute profits as dividends, you must include them in your personal tax return. However, you receive a franking credit equal to the company tax paid. For most individuals, the combined effective tax rate ends up close to their marginal personal rate. At the $75,000 salary range (32.5% marginal rate), franked dividends from a 25% tax-rate company result in a small top-up payment.
Practical Tips
- Confirm each year whether your company qualifies as a base rate entity — if passive income grows or you acquire associated entities, your rate could change to 30%.
- Keep a loan account register for any funds directors draw from the company to ensure Division 7A compliance — even small informal transfers can trigger issues.
- Discuss the salary vs. dividend mix with your accountant each year, particularly around the June 30 year-end, to optimise the overall tax position across the company and personal returns.
- Model your PAYG instalment obligations at the start of each financial year to avoid a large lump-sum tax payment when you file your company return.
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