On 10.10.16, the Senate Economics Legislation Committee tabled its report recommending that the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 be passed.

However, in a dissenting report, Labor Senators proposed the following amendments to the Bill:

  • only reduce the company tax rate to 27.5% for businesses with a turnover of less than $2m (the threshold that remains consistent with the ATO definition of a small business);
  • only increase the unincorporated small business tax discount from 5% to 8%, and only for businesses with a turnover with a turnover of less than $2m; and
  • not proceed with the increase to the small business entity threshold.

The Bill is currently before the House of Reps.

[APH – report] [APH – page, Bill & EM] [LTN 196, 11/10/16]

Extract from Report

Committee view

2.97 The committee considers the Enterprise Tax Plan, as set out in the bill, a critical reform that will improve Australia’s tax system for businesses and drive investment and growth in the economy. There is clear and compelling evidence that the benefits of the Enterprise Tax Plan will ultimately flow through to growth in jobs and wages, helping to improve Australian living standards overall.

2.98 The committee is also satisfied that the substantial economic benefits of the Enterprise Tax Plan more than outweigh its cost to revenue, which will at any rate be largely offset by higher levels of economic growth.

Extract from the EM on franking over the transition period

[Without following this through properly, I think this means that franking credits are still stored in dollars of company tax paid but the maximum rate at which dividends can be franked decreases as the company’s tax rate decreases (in other words, dividends can only be franked at the 27.5% rate if that is the current rate at which the company pays tax). As this applies to retained profits, reduced rate would mean that it will be slower to get franking credits out (per dollar of dividend) but there should be no loss of overall franking credits (a smaller ‘hose’ but no loss of water in the ‘tank’).]

Amendments that apply from the 2016-17 income year to 2022-23 income year

1.67 Under the company imputation system, when an Australian corporate tax entity distributes profits to its members, the entity has the option of passing to those members credit for income tax paid by the entity on the profits. This is done by franking the distribution.

1.68 The amount of franking credits that can be attached to a distribution cannot exceed the maximum franking credit for the distribution (section 202-60 of the ITAA 1997). The maximum franking credit is worked out by reference to the corporate tax gross-up rate, which is defined in subsection 995-1(1) by reference to the standard corporate tax rate. The standard corporate tax rate is defined in subsection 995-1(1) to mean the 30 per cent corporate tax rate (even if the entity is a small business entity that is taxed at the 28.5 per cent corporate tax rate).

1.69 In the period from the 2016-17 income year to 2022-23 income year, many corporate tax entities will have a corporate tax rate of 27.5 per cent. Other entities will have a corporate tax rate of 30 per cent. The corporate tax rate that applies to an entity in a particular income year will depend on the entity’s aggregated turnover in that income year.

1.70 During that period, a greater number of corporate tax entities will be entitled to the 27.5 per cent corporate tax rate each year, reflecting the increase in the aggregated turnover to qualify as a base rate entity. Therefore, it is not feasible to continue to operate the imputation system at the headline corporate tax rate of 30 per cent for all corporate tax entities.

1.71 Consequently, from the 2016-17 income year, the operation of imputation system for corporate tax entities will be based on the company’s corporate tax rate for a particular income year, worked out having regard to the entity’s aggregated turnover for the previous income year. This is necessary because corporate tax entities usually pay distributions to members for an income year during that income year. However, a corporate tax entity will not know its aggregated turnover for a particular income year (and therefore its corporate tax rate for that income year) until after the end of the income year.

1.72 This change does not alter basic operation of the imputation system. Distributions to members who are domestic shareholders will continue to be ultimately taxed at the member’s marginal tax rate.

1.73 As a result of this change, for the purposes of applying provisions in the imputation system, corporate tax entities will use the corporate tax rate for imputation purposes. This is generally defined to mean the entity’s corporate tax rate for the income year (the current income year), worked out on the assumption that the entity’s aggregated turnover for the income year is equal to its aggregated turnover for the previous income year. [Schedule 4, item 28, paragraph (a) of the definition of ‘corporate tax rate for imputation purposes’ in subsection 995-1(1) of the ITAA 1997]