Have you ever scratched your head trying to figure out how your business is taxed in Australia? You’re not alone. For many small business owners, corporate tax rules can feel like a minefield. One term you may have come across is the Base Rate Entity (BRE). But what exactly does it mean—and how does it affect your business’s tax rate?
At Prudent Accountants & Co, we’re here to break down these financial concepts in plain English so you can focus more on growing your business and less on deciphering tax jargon.
What is a Base Rate Entity (BRE)?
In simple terms, a Base Rate Entity is a company that qualifies for a lower company tax rate. The Australian Taxation Office (ATO) introduced this concept to help small to medium-sized businesses thrive. So if your business is eligible, you could pay less tax—now, who doesn’t like that?
Here’s the deal: What’s the tax rate?
The standard corporate tax rate in Australia is currently 30%. But if you’re a Base Rate Entity, you may be entitled to a reduced rate:
- 25% in the 2021–22 income year and beyond
That’s a 5% saving—which can be a serious boost for your bottom line.
So, Who Qualifies as a Base Rate Entity?
Not every company is eligible. To qualify as a BRE, your company must meet two key conditions in a given income year:
- Your business has an aggregated turnover of less than $50 million
- No more than 80% of your assessable income can come from passive income sources
Let’s unpack that a bit so it’s totally clear.
1. What’s “Aggregated Turnover”?
This is your business’s total annual income, including income from related or affiliated companies. So if you own multiple businesses, or you’re connected to other entities through control or ownership, the turnovers are combined to check if you’re under the $50 million threshold.
Think of it like checking your household income when applying for a loan—it’s not just what you make, but what your spouse or parents contribute too.
2. What Is “Passive Income” Anyway?
Passive income refers to money you earn without active involvement. This often includes:
- Dividends
- Interest
- Rent from property
- Royalties
- Net capital gains
If more than 80% of your company’s income comes from these sources, the ATO says you’re too “passive” to qualify as a Base Rate Entity.
Active vs Passive Businesses: A Simple Example
Let’s say you run a digital marketing firm that earns $2 million a year from client projects. All of that income is from active business activity. So as long as your total turnover—including any related entities—is under $50 million, and minimal income is “passive,” congratulations—you’re a Base Rate Entity!
Now imagine instead that you own a company that makes $2 million from rental properties and dividends. That’s considered mostly passive income. In that case, even with a low turnover, your company wouldn’t qualify for the reduced tax rate.
Why Should You Care About BRE Status?
Because saving on tax = more cash in your bank account.
If your company qualifies as a BRE and you’re eligible for the 25% tax rate, that reduced rate can lead to:
- Higher profits available for reinvestment or dividends
- Improved cash flow, making it easier to manage day-to-day expenses
- Better planning for long-term growth
Over time, small changes in your tax obligations can make a big impact on strategic decisions like expansion, hiring, or equipment purchases.
Common Mistakes to Avoid
Even though the rules sound straightforward, many businesses miss out on the lower rate due to some common slip-ups.
- Incorrectly calculating turnover: Make sure related entities are included.
- Misclassifying income: Not sure if something counts as passive or active income? Better to double-check with your accountant.
- Assuming eligibility year-to-year: BRE status needs to be assessed each income year in case your earnings or income types change.
Franking Credits and BREs
If your company pays dividends, you probably know about franking credits. These prevent double taxation by passing on the tax a company’s already paid to shareholders.
But here’s the catch—if you’re a BRE and using the 25% tax rate, your maximum franking rate also drops to 25%. That can impact what your shareholders get back from the ATO. So it’s important to factor this into your dividend strategy.
Still Not Sure If You Qualify?
If reading this made you wonder whether your business checks all the boxes, that’s totally normal. Tax rules can be a maze. But that’s where we come in!
At Prudent Accountants & Co, we’ve helped hundreds of businesses figure out exactly where they stand. We can review your income streams, assess turnover and related entities, and help you avoid costly mistakes.
Here’s how we can help:
- Evaluate your eligibility for BRE status
- Restructure income if needed to minimize tax
- Ensure compliance with ATO rules
- Create tax-efficient dividend strategies
Tax shouldn’t be a guessing game—and with the right advice, it doesn’t have to be.
In Summary: BRE Basics You Should Remember
- Tax rate: 25% for eligible companies
- Criteria: Less than $50 million turnover + no more than 80% passive income
- Benefits: Lower tax bill, improved cash flow, growth potential
- Don’t forget: Review status annually and consider franking credit impacts
Understanding Base Rate Entity rules doesn’t have to be complicated. With a little guidance and the right support, you can unlock smart tax savings that help your business grow faster.
Need Help Navigating Corporate Tax Rules?
Let’s chat. Get in touch with Prudent Accountants & Co today and let our team of experienced professionals guide you towards smarter tax planning and better business outcomes.
Because when it comes to tax, getting it right could mean big savings for you and your business.
Disclaimer: This article is intended to provide general information only. It does not constitute tax, financial, or legal advice. You should seek professional advice tailored to your specific circumstances before making any decisions.
