What is a base rate entity? Fact versus fiction

What is a base rate entity?

A base rate entity is a company eligible for Australia's lower company tax rate. As of the 2023-24 financial year, the base rate entity tax rate is 25%, compared to the standard company tax rate of 30%. To qualify as a base rate entity, your company must meet specific criteria set by the ATO. These criteria are designed to support small businesses and startups by offering a reduced tax burden, enabling them to reinvest more of their earnings back into the business.

How does a company meet the base rate entity criteria?

To determine whether your company qualifies as a base rate entity, you need to meet two main criteria:

1. Aggregated turnover: Your company's aggregated turnover must be less than $50 million. This turnover includes not just your company's income but also the income of any connected entities or affiliates. This threshold ensures that the lower tax rate targets small businesses and startups that can benefit the most from the reduced tax burden.
2. Passive income threshold: Your company must derive at most 80% of its income from passive sources. Passive income includes dividends, interest, rent, and capital gains. If your company earns more than 80% of its revenue from these sources, it will not qualify as a base rate entity, regardless of its turnover.

By meeting these criteria, your company can enjoy the benefits of the lower tax rate, which can be a significant advantage for small businesses looking to grow.

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What are the benefits of using a base rate entity?

The benefits of qualifying as a base rate entity go beyond simply paying less tax. Here are some of the key advantages:

1. Increased cash flow: Paying a lower tax rate means more money stays in your business. This extra cash can be used to reinvest in the business, whether hiring new staff, purchasing equipment, or expanding your operations. This additional cash flow can be the difference between surviving and thriving for startups and small businesses.
2. Competitive advantage: In a competitive market, having more resources can give your business an edge. Whether investing in marketing, improving your product, or offering better terms to customers, the financial flexibility provided by the base rate entity tax rate can be a powerful tool.
3. Encouragement to grow: The base rate entity tax rate is designed to support businesses in the growth phase. You have more opportunities to scale your operations by keeping more of your profits. This can be particularly beneficial for startups, where every dollar counts towards achieving sustainability and growth.
4. Simplified compliance: The ATO's clear criteria for base rate entities make understanding and managing your tax obligations easier. Knowing you qualify for a lower tax rate can simplify your tax planning and reduce the stress of navigating complex tax regulations.

Can a bucket company be a base rate entity?

A common question among small business owners and accountants is whether a bucket company can qualify as a base rate entity. A bucket company is typically used in tax planning to "bucket" or accumulate profits from other entities, often intending to defer tax or distribute profits more tax effectively.

A bucket company can be a base rate entity if it meets the earlier criteria: an aggregated turnover of less than $50 million and no more than 80% of its income derived from passive sources. However, since a bucket company often receives income in dividends (a form of passive income), meeting the passive income threshold can be difficult.

If the bucket company fails to qualify as a base-rate entity, it will be taxed at the standard corporate tax rate of 30%. Therefore, careful consideration and planning are essential when setting up and managing a bucket company, mainly if you aim to benefit from the lower base-rate entity tax rate.

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How do I confirm my base rate entity status?

To confirm whether your company qualifies as a base rate entity, you must evaluate your business's financials against the ATO's criteria. Here's how to go about it:

1. Review your aggregated turnover: Calculate your company's aggregated turnover, ensuring you include any connected entities or affiliates. If your total turnover is less than $50 million, your company meets the first criterion.
2. Assess your income sources: Analyse your income to determine how much is from passive sources. When 80% or less of your income is passive, your company meets the second criterion.
3. Check for changes in circumstances: If your company's situation changes—such as a significant increase in passive income or turnover—it may affect your base rate entity status. Regularly reviewing your financials will help ensure you continue to meet the criteria.
4. Consult a professional: While the requirements are straightforward, interpreting and applying them to your circumstances can be complex. I recommend consulting with an accountant or tax professional to confirm your base rate entity status and ensure you take full advantage of the benefits.

Why Thriday is perfect for base rate entities

Managing a small business or startup comes with challenges, and ensuring you make the right financial decisions is crucial. This is where Thriday comes in. Thriday's all-in-one financial management platform is designed with small businesses and startups in mind, making it easier to stay on top of your finances, including managing your base rate entity status.

Here's why Thriday is the perfect partner for base rate entities:

1. Integrated banking and payments: Thriday is the only software that combines banking with accounting and tax. This means that on the same platform you use to lodge your taxes, you can also open business cards, Visa Debit cards, and payments, including BPAY.
2. Automated accounting and tax management: Thriday's platform automates many time-consuming accounting and tax management tasks. By automatically categorising your income and expenses, Thriday helps ensure your financial records are accurate and up-to-date, making it easier to confirm your base rate entity status.
3. Real-time financial insights: Thriday provides real-time insights into your business's financial health. With precise, up-to-date data at your fingertips, you can make informed decisions about your business, including whether you continue to qualify as a base rate entity.
4. Streamlined reporting: Thriday's platform simplifies preparing and lodging tax returns. You can easily track your aggregated turnover and income sources with integrated reporting features, ensuring you meet the ATO's criteria for base rate entities.
5. Expert support: Thriday isn't just a software platform—it's backed by a team of experts who understand the unique challenges small businesses and startups face. Whether you need help confirming your base rate entity status or advice on optimising your tax strategy, Thriday's experts support you.
6. Scalable Solutions: As your business grows, so do your financial management needs. Thriday's platform is scalable, meaning it can grow with your business. Whether you're just starting or expanding rapidly, Thriday provides the tools and support you need to succeed.

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Key takeaways

Understanding what a base rate entity is and whether your business qualifies for this status can significantly impact your tax obligations and overall financial health. By meeting the ATO's criteria for base rate entities, your business can benefit from a lower tax rate, increased cash flow, and more significant growth opportunities.

If you're unsure whether your business qualifies as a base rate entity or you're looking for a financial management solution that can help you take advantage of the benefits, I recommend exploring what Thriday has to offer. With Thriday by your side, you can focus on growing your business, knowing that your financial management is in expert hands.