RBizz Corporate Accountants - Resources #Company TaxRBizz Corporate Accountants - Resources #Company Taxhttps://www.rbizz.com.au/blogs/tag/company-taxSun, 30 Aug 2026 08:19:39 +1000http://zoho.com/sites/<![CDATA[Company Tax Rate: Base Rate Entity vs Standard Rate — Which Applies to You]]>https://www.rbizz.com.au/blogs/post/company-tax-rate-base-rate-entity-vs-standard-rate-—-which-applies-to-you1Companies must pass both an aggregated turnover test and an 80% passive income test to access the lower 25% rate, and both need to be checked every single year — not assumed to carry forward.]]>
Company Tax Rate: Base Rate Entity vs Standard Rate — Which Applies to You


Company Tax Rate: Base Rate Entity vs Standard Rate — Which Applies to You

Australian companies pay tax at one of two rates: 25% for a "base rate entity," or 30% for companies that don't meet that definition. Getting this wrong doesn't just mean an incorrect tax calculation — it directly affects your franking account and the franking credits passed on to shareholders, which can create a mismatch that surfaces later, sometimes years after the return in question was lodged.

What Makes a Company a "Base Rate Entity"

A company qualifies for the lower 25% rate as a base rate entity if it meets both of these tests for the income year:

1. Aggregated turnover test: the company's aggregated turnover — including the turnover of connected entities and affiliates, not just the company on its own — must be below the relevant threshold (confirm the current threshold, as this figure is periodically reviewed).


2. Passive income test: no more than 80% of the company's assessable income for the year can be "base rate entity passive income" — which includes things like dividends, interest, rent, royalties, and net capital gains. If more than 80% of income comes from these passive sources, the company doesn't qualify for the lower rate, even if turnover is well under the threshold.

Where This Trips Companies Up

Aggregated turnover catches more than expected.





Aggregated turnover catches more than expected. If your company is connected to or affiliated with other entities — related companies under common control, for example — their turnover counts toward your aggregated turnover test, even if your own company's individual turnover is small. A company with modest direct revenue can still fail this test if it's grouped with other entities that push the combined figure over the threshold.

The passive income test can shift year to year




The passive income test can shift year to year. A trading company that has a quiet year with a large one-off capital gain or significant interest income can inadvertently breach the 80% passive income threshold for that specific year, even though its usual business is squarely active trading income. This means base rate entity status isn't necessarily a permanent classification — it needs to be checked every year.

Franking credits need to match the rate actually applicable.




Franking credits need to match the rate actually applicable. When a company frank a dividend, the franking credit needs to reflect the tax rate the underlying profit was actually taxed at. If a company incorrectly assumes it's a base rate entity (25%) when it should have applied 30%, dividends can be under-franked or over-franked relative to what the franking account actually supports — creating a correction that flows through to shareholders' personal tax positions.

A Quick Example of Why This Matters

    Scenario: A company assumes it qualifies as a base rate entity and franks a dividend using a 25% rate. If a review later determines the company should have been taxed at 30% for that year (because the passive income test wasn't actually met), the franking credit passed to shareholders was calculated on the wrong basis — potentially leaving the company with an under-franked distribution relative to its actual franking account position, and shareholders with an incorrect tax offset on their own returns.

What to Check Each Year, Not Just Once

  1. Recalculate aggregated turnover annually, including all connected entities and affiliates — don't assume last year's classification automatically carries forward.
  2. Check the passive income percentage for the specific year, particularly if the company had any unusual capital gains, large interest income, or significant rental income that year.
  3. Confirm the franking rate applied to any dividends matches the company's actual base rate entity status for that year, not an assumed or previous year's status.
  4. Review group structure changes, since a new connected entity or a change in shareholding can affect the aggregated turnover calculation going forward.

Confirm Your Rate Before You Frank a Dividend

Given the direct flow-through effect on franking credits and shareholder tax positions, it's worth confirming your company's base rate entity status for the specific year before finalising dividends, rather than assuming the classification from a prior year still applies.

RBizz confirms base rate entity status annually as part of company tax return preparation — get in touch to check your classification is being applied correctly.

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]]>Sat, 29 Aug 2026 23:23:24 +1000<![CDATA[Division 7A Explained: The Hidden Tax Risk in Company Loans to Directors]]>https://www.rbizz.com.au/blogs/post/division-7a-explained-the-hidden-tax-risk-in-company-loans-to-directorsInformal money movements between a company and its directors can accidentally trigger Division 7A, turning a simple withdrawal into taxable income at the director's personal rate. This guide explains what triggers it, how to structure a compliant loan, and why the fix depends on timing.]]>
Division 7A Explained: The Hidden Tax Risk in Company Loans to Directors


Division 7A Explained: The Hidden Tax Risk in Company Loans to Directors

It's one of the most common ways a company owner accidentally creates a tax problem for themselves: taking money out of the company informally, without realising the ATO has specific rules designed to treat that withdrawal as taxable income.


That's Division 7A — and it catches out far more businesses than most owners expect, usually not because anyone was trying to avoid tax, but because nobody realised the rule applied to their situation.


What Division 7A Actually Is

Division 7A is an anti-avoidance provision in the tax law designed to stop company profits being extracted by shareholders or their associates (including directors) in a way that avoids paying tax on that income as a dividend.


In plain terms: if you or an associated entity takes money, an asset, or forgiven debt out of a private company — and it isn't properly structured as salary, a genuine loan, or a dividend — the ATO can treat it as an unfranked dividend. That means it becomes assessable income in your hands, generally without the benefit of franking credits, which usually results in a higher personal tax bill than if it had been handled correctly from the start.


The Situations That Commonly Trigger It

Division 7A doesn't only apply to obvious "loans." It can be triggered by:

  • Informal director loans — money taken from the company account for personal use without a loan agreement in place.
  • Use of company assets — a director using a company-owned property, vehicle, or other asset without paying market value for that use.
  • Debt forgiveness — the company writing off an amount owed by a director or associate.
  • Payments to associated entities — not just the director personally, but related trusts, family members, or other related businesses.
  • Unpaid present entitlements (UPEs) — trust distributions owed to a corporate beneficiary that remain unpaid can, in some circumstances, also fall within Division 7A's scope.

The common thread is simple: value has left the company and reached a shareholder or associate, without being properly taxed as a dividend, salary, or a compliant loan.


How to avoid the problem

The good news is that Division 7A is entirely manageable — it's a compliance issue, not an unavoidable tax cost, provided it's addressed at the right time.

1. Put a complying loan agreement in place

If money is genuinely intended to be a loan, it needs a written agreement that meets specific requirements — including a market interest rate and a maximum loan term — put in place before the company's tax return lodgment date for the year the loan was made.

2. Make minimum yearly repayments

A complying Division 7A loan requires minimum repayments each year, covering both principal and interest. Missing a minimum repayment can trigger a deemed dividend for the shortfall.

3. Pay for personal use of company assets at market value

If a director uses a company asset personally, charging (and actually paying) a market rate for that use avoids the issue arising in the first place.

4. Deal with unpaid trust entitlements correctly

Where a trust owes an unpaid distribution to a corporate beneficiary, specific sub-trust or loan arrangements may be needed to keep the arrangement compliant.

5. Review before lodgment, not after

Because the compliance window is generally tied to the lodgment date of the company's tax return, informal withdrawals from earlier in the year can often still be fixed — but only if they're identified and addressed before that return is lodged.


Why This Gets Missed So Often

Division 7A issues usually don't come from deliberate tax avoidance. They come from:

  • A director treating the company bank account like a personal one, especially in owner-operated businesses
  • Assuming an informal understanding ("I'll pay it back eventually") is enough
  • Not realising trust distributions to a company can also be caught by the rule
  • Discovering the issue during a tax return review, after the compliance window has already closed

The Cost of Getting This Wrong

If Division 7A applies and nothing is done to fix it, the amount involved can be treated as an unfranked dividend in the relevant shareholder's hands — increasing their personal tax liability, often unexpectedly, and sometimes for an amount they no longer have on hand because it was spent long before the tax return was prepared.


Catch It Before It Costs You

If your company has ever paid for a director's personal expenses, let a director use a company asset, or has unpaid trust distributions sitting on the books, it's worth a proactive Division 7A review — ideally well before your company's tax return is due.


RBizz reviews director loans, trust distributions, and related-party transactions before they become a tax problem — schedule a free consultation to check your company's position.


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