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Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017

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2016-2017

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws Amendment (Enterprise Tax Plan no. 2) Bill 2017

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Treasurer, the Hon Scott Morrison MP)





Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Reducing the corporate tax rate......................................... 5

Index................................................................................................................. 25

 

 



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

Combating Multinational Tax Avoidance Act

Treasury Laws Amendment (Combating Multinational Tax Avoidance) Act 2017

Enterprise Tax Plan Act

Treasury Laws Amendment (Enterprise Tax Plan) Act 2017

Enterprise Tax Plan Bill

Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

OECD

Organisation for Economic Co-operation and Development

PDF

Pooled Development Fund

Rates Act

Income Tax Rates Act 1986

RSA

Retirement Savings Account



Reducing the corporate tax rate

Schedule 1 to this Bill amends the Income Tax Rates Act 1986 (Rates Act) to progressively extend the lower 27.5 per cent corporate tax rate to all corporate tax entities by the 2023-24 income year. The corporate tax rate will then be cut, for all corporate tax entities, to:

•        for the 2024-25 income year — 27 per cent;

•        for the 2025-26 income year — 26 per cent; and

•        for the 2026-27 income year and later income years — 25 per cent.

Schedules 2 to 4 make consequential amendments to the income tax law to reflect the extension of the reduction in the corporate tax rate to all corporate tax entities.

Date of effect The progressive extension of the lower 27.5 per cent corporate tax rate to corporate tax entities with aggregated turnover of $50 million or more will commence from the 2019-20 income year.

Proposal announced The Government’s enterprise tax plan was announced on 3 May 2016 as part of the 2016-17 Budget.

Financial impact These amendments have the following revenue implications:

2016-17

2017-18

2018-19

2019-20

2020-21

0

0

0

-­$100m

-$500m

Human rights implications :  These Schedules do not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 1, paragraphs 1.85 to 1.89.

Compliance cost impact :  Nil.

Summary of regulation impact statement

Regulation impact on business

Impact As this measure is changing rates that are currently part of the tax system, it is not expected to generate any regulatory costs. The Regulation Impact Statement for the Government’s enterprise tax plan is in the Explanatory Memorandum to Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (the Enterprise Tax Plan Bill).

 



Chapter 1          

Reducing the corporate tax rate

Outline of chapter

1.1                   Schedule 1 to this Bill amends the Rates Act to progressively extend the lower 27.5 per cent corporate tax rate to all corporate tax entities by the 2023-24 income year. The corporate tax rate will then be cut, for all corporate tax entities, to:

•        for the 2024-25 income year — 27 per cent;

•        for the 2025-26 income year — 26 per cent; and

•        for the 2026-27 income year and later income years — 25 per cent.

1.2                   Schedules 2 to 4 make consequential amendments to the income tax law to reflect the extension of the reduction in the corporate tax rate to all corporate tax entities.

Context of amendments

1.3                   In the 2016-17 Budget the Government announced its intention to reduce the corporate tax rate to 25 per cent for all corporate tax entities by the 2026-27 income year.

1.4                   Legislation to implement the Government’s enterprise tax plan was introduced in the Enterprise Tax Plan Bill. The Senate amended the Bill to remove the planned corporate tax rate cuts for corporate tax entities with a turnover of $50 million or more. Therefore, under the current law, these corporate tax entities will continue to face a corporate tax rate of 30 per cent.

1.5                   The Government supported the Senate amendments in order to deliver tax relief and provide certainty for around 3.2 million small and medium Australian businesses, employing 6.7 million workers.

1.6                   The Government remains committed to delivering a corporate tax rate cut for corporate tax entities under its enterprise tax plan. Therefore, this Bill amends the Rates Act to implement the remainder of the Government’s enterprise tax plan.

1.7                   Australia’s strong economic performance over 25 years has come in the face of large global economic shocks and ongoing instability, as well as a range of domestic challenges. At the same time, extraordinary technological change and increasing global connectivity have created new opportunities and transformed how we live, work and do business.

1.8                   The tax system needs to adapt to these challenges so that it continues to support Australia’s growth into the future. In addition, the tax system needs to be fair and sustainable. A competitive company tax rate is crucial to Australia’s economic success and will help underpin the longevity of the system.

1.9                   An uncompetitive business environment can be the difference between firms investing in Australia or choosing to invest elsewhere.

1.10               At 30 per cent, Australia’s headline corporate tax rate is now one of the highest in the world and significantly above the average for Organisation for Economic Co-operation and Development (OECD) countries and those in the Asian region. In 2017, of 35 OECD economies, only four have higher corporate tax rates than Australia. This is expected to deteriorate further as other nations announce plans to reduce their tax rates in the future.

1.11               The reduction in the corporate tax rate for all companies, to 25 per cent by the 2026-27 income year, will encourage investment and higher paid jobs. It will also make Australian companies more internationally competitive in a tough global market place.

1.12               The Government’s enterprise tax plan will result in higher living standards for Australians and an expected permanent increase in the size of the economy of just over one per cent in the long term.

Operation of the current law

1.13               For the 2017-18 income year, the corporate tax rate for an ordinary corporate tax entity is:

•        if the entity is a base rate entity — 27.5 per cent; or

•        otherwise — 30 per cent.

1.14               An entity is a base rate entity if it carries on a business and has an aggregated turnover of less than

•        for the 2017-18 income year — $25 million; and

•        for the 2018-19 income year and later income years — $50 million.

1.15               Special rules apply to:

•        corporate tax entities that are retirement savings account (RSA) providers;

•        corporate tax entities that become pooled development funds (PDFs) during an income year;

•        non-profit companies;

•        recognised medium credit unions;

•        life insurance companies; and

•        public trading trusts.

Corporate tax entities that are RSA providers

1.16               The taxable income of corporate tax entities (other than life insurance companies) that are RSA providers is divided into two components:

•        the RSA component — which is taxed at a 15 per cent rate; and

•        the standard component — which is taxed at a rate of:

-                  if the entity is a base rate entity — 27.5 per cent; or

-                  otherwise — 30 per cent.

Corporate tax entities that become PDFs during an income year

1.17               The taxable income of corporate tax entities that become PDFs during an income year is divided into three components:

•        the small and medium enterprises income component — which is taxed at a 15 per cent rate;

•        the unregulated investment component — which is taxed at a 25 per cent rate; and

•        the amount that exceeds the PDF component — which is taxed at a rate of:

-                  if the entity is a base rate entity — 27.5 per cent; or

-                  otherwise — 30 per cent.

Non-profit companies

1.18               Non-profit companies pay no tax on the first $416 of their taxable income. Tax is then shaded in at a rate of 55 per cent of the excess over $416 until the tax on taxable income equals the corporate tax rate. Where the taxable income exceeds the shade-in limit, the full taxable income is effectively taxed at the corporate tax rate.

1.19               Currently, the shade-in limit is:

•        for non-profit companies that are base rate entities — $832 (reflecting the current 27.5 per cent corporate tax rate that applies to corporate tax entities that are base rate entities); or

•        for all other non-profit companies — $915 (reflecting the 30 per cent corporate tax rate).

1.20               Therefore, the rates of tax payable by a non-profit company that is a base rate entity is:

•        first $416 of taxable income — nil;

•        taxable income between $416 and $832 — 55 per cent; and

•        taxable income above $832 — 27.5 per cent.

Recognised medium credit unions

1.21               Credit unions fall into three categories for income tax purposes:

•        recognised small credit unions;

•        recognised medium credit unions; and

•        recognised large credit unions.

1.22               A credit union is a recognised small credit union if, broadly, its notional taxable income is less than $50,000. Recognised small credit unions are exempt from tax on interest derived from loans to members. Other taxable income derived by a recognised small credit union is taxed at the relevant corporate tax rate.

1.23               A credit union is a recognised medium credit union if, broadly, its notional taxable income is between $50,000 and $150,000. A recognised medium credit union is subject to an effective tax rate based on a sliding scale, according to its level of taxable income.

1.24               Currently, the tax payable by a recognised medium credit union (before any offsets or credits) is limited to:

•        for recognised medium credit unions that are base rate entities — 41.25 per cent of the amount by which the credit union's taxable income exceeds $49,999 (reflecting the 27.5 per cent corporate tax rate that applies to corporate tax entities that are base rate entities); or

•        for all other recognised medium credit unions — 45 per cent of the amount by which the credit union's taxable income exceeds $49,999 (reflecting the 30 per cent corporate tax rate).

1.25               A credit union is a recognised large credit union if, broadly, its notional taxable income is $150,000 or more. The taxable income derived by a recognised large credit union is taxed at the relevant corporate tax rate.

Life insurance companies

1.26               The taxable income of life insurance companies is divided into two classes:

•        the ordinary class — which is taxed at a 30 per cent rate; and

•        the complying superannuation class — which is taxed at a 15 per cent rate.

1.27               A substantial part of the ordinary class of taxable income of a life insurance company represents investment income relating to ordinary life insurance policyholders. Therefore, to ensure competitive neutrality, the lower corporate tax rate that applies to corporate tax entities that are base rate entities does not apply to the ordinary class of taxable income of life insurance companies.

Public trading trusts

1.28               Public trading trusts are taxed as corporate tax entities. Therefore, a public trading trust is taxed at a rate of:

•        if the trust is a base rate entity — 27.5 per cent; or

•        otherwise — 30 per cent.

Summary of new law

1.29               Schedule 1 to this Bill amends the Rates Act to progressively reduce the corporate tax rate to 27.5 per cent for all corporate tax entities by the 2023-24 income year.

1.30               Currently, the corporate tax rate for a corporate tax entity that is a base rate entity is 27.5 per cent. A corporate tax entity is a base rate entity if it carries on a business and has an aggregated turnover of less than:

•        for the 2017-18 income year — $25 million; and

•        for the 2018-19 income year and later income years — $50 million.

1.31               The aggregated turnover threshold which applies to determine whether a corporate tax entity is a base rate entity that qualifies for the 27.5 per cent corporate tax rate will be raised annually to:

•        for the 2019-20 income year — $100 million;

•        for the 2020-21 income year — $250 million;

•        for the 2021-22 income year — $500 million; and

•        for the 2022-23 income year — $1 billion.

1.32               In the 2023-24 income year, the aggregated turnover threshold test to qualify for the lower corporate tax rate will be removed. In that income year, the corporate tax rate will be 27.5 per cent for all corporate tax entities.

1.33               The corporate tax rate will then be further reduced, for all corporate tax entities, to:

•        for the 2024-25 income year — 27 per cent;

•        for the 2025-26 income year — 26 per cent; and

•        for the 2026-27 income year and for later income years — 25 per cent.

1.34               Schedules 2 to 4 make consequential amendments to the income tax law to reflect the extension of the reduction in the corporate tax rate to all corporate tax entities.

Comparison of key features of new law and current law

New law

Current law

The 27.5 per cent corporate tax rate will progressively be extended to all corporate tax entities by the 2023-24 income year.

To achieve this, the aggregated turnover threshold which applies to determine whether a corporate tax entity is a base rate entity that qualifies for the 27.5 per cent corporate tax rate will be raised annually to:

•        for the 2019-20 income year — $100 million;

•        for the 2020-21 income year — $250 million;

•        for the 2021-22 income year — $500 million; and

•        for the 2022-23 income year — $1 billion.

The corporate tax rate for corporate tax entities that are not base rate entities will remain at 30 per cent.

In the 2023-24 income year, the base rate entity threshold test will be removed. Consequently, the corporate tax rate will be 27.5 per cent for all corporate tax entities.

The corporate tax rate will then be further reduced, for all corporate tax entities, to:

•        for the 2024-25 income year — 27 per cent;

•        for the 2025-26 income year — 26 per cent; and

•        for the 2026-27 income year and for later income years — 25 per cent.

From the 2017-18 income year, the corporate tax rate for a corporate tax entity that is a base rate entity is 27.5 per cent.

A corporate tax entity is a base rate entity if it carries on a business and has an aggregated turnover of less than:

•        for the 2017-18 income year — $25 million; and

•        for the 2018-19 income year and later income years — $50 million.

The corporate tax rate for base rate entities is later reduced to:

•        for the 2024-25 income year — 27 per cent;

•        for the 2025-26 income year — 26 per cent; and

•        for the 2026-27 income year and for later income years — 25 per cent.

The corporate tax rate for corporate tax entities that are not base rate entities is 30 per cent.

 

Detailed explanation of new law

1.35               Schedule 1 to this Bill amends the Rates Act to progressively extend the lower 27.5 per cent corporate tax rate to all corporate tax entities by the 2023-24 income year. The corporate tax rate will then be cut, for all corporate tax entities, to:

•        for the 2024-25 income year — 27 per cent;

•        for the 2025-26 income year — 26 per cent; and

•        for the 2026-27 income year and later income years — 25 per cent.

1.36               Schedules 2 to 4 make consequential amendments to the income tax law to reflect the extension of the reduction in the corporate tax rate to all corporate tax entities.

Extending the 27.5 per cent corporate tax rate to all corporate tax entities by the 2023-24 income year

1.37               From the 2017-18 income year, the corporate tax rate for a corporate tax entity that is a base rate entity is a 27.5 per cent. The corporate tax rate for corporate tax entities that are not base rate entities is 30 per cent.

1.38               A corporate tax entity is a base rate entity if it carries on a business and has an aggregated turnover of less than:

•        for the 2017-18 income year — $25 million; and

•        for the 2018-19 income year and later income years — $50 million.

1.39               Parts 1 to 5 of Schedule 1 to this Bill amend the Rates Act to progressively extend the lower 27.5 per cent corporate tax rate to all corporate tax entities by the 2023-24 income year by:

•        increasing the aggregated turnover threshold to qualify as a base rate entity annually from the 2019-20 income year to the 2022-23 income years; and

•        removing the base rate entity threshold in the 2023-24 income year (so that the 27.5 per cent corporate tax rate will apply to all corporate tax entities).

Increasing the aggregated turnover threshold to qualify as a base rate entity

1.40               For income years from the 2019-20 income year until the 2022-23 income year, the aggregated turnover threshold which applies to determine whether a corporate tax entity is a base rate entity that qualifies for the 27.5 per cent corporate tax rate will be raised annually, as outlined in Table 1.1.

Table 1.1 : Annual aggregated turnover to qualify as a base rate entity from the 2019-20 income year until the 2022-23 income year

Income year

Annual aggregated turnover threshold

2019-20

$100 million

2020-21

$250 million

2021-22

$500 million

2022-23

$1 billion

[Schedule 1, items 1 to 4, paragraph 23AA(b) of the Rates Act]

27.5 per cent corporate tax rate applies to all corporate tax entities

1.41               In the 2023-24 income year, the corporate tax rate will be 27.5 per cent for all corporate tax entities. The 27.5 per cent rate will apply to:

•        the taxable income of ordinary corporate tax entities;

•        the standard component of taxable income of companies (other than life insurance companies) that are RSA providers;

•        the amount that exceeds the PDF component of taxable income of companies that become PDFs during an income year;

•        the ordinary class of taxable income of life insurance companies; and

•        the taxable income of public trading trusts.

[Schedule 1, items 7 to 9, 13 and 14, subsection 23(2), paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates Act]

1.42               For non-profit companies, the shade-in limit will be $832 for all companies for the 2023-24 income year. [Schedule 1, item 10, paragraph 23(6)(b) of the Rates Act]

1.43               Therefore, for the 2023-24 income year, the rates of tax payable by a non-profit company will be:

•        first $416 of taxable income — nil;

•        taxable income between $416 and $832 — 55 per cent; and

•        taxable income above $832 — 27.5 per cent.

1.44               For all recognised medium credit unions, the rate of tax on taxable income exceeding $49,999 will be 41.25 per cent for the 2023-24 income year . [Schedule 1, item 11, subsection 23(7) of the Rates Act]

1.45               As a consequence of all corporate tax entities being taxed at the same rate, the definition of base rate entity will be removed. [Schedule 1, items 5 and 12]

1.46               In some cases, the trustee of a trust is liable to tax on an amount to which a non-resident beneficiary is entitled (subsection 98(3) of the Income Tax Assessment Act 1936 (ITAA 1936)). Under the new tax system for managed investment trusts, the trustee of an attribution managed investment trust is liable to tax in similar circumstances (section 276-105 of the Income Tax Assessment Act 1997 (ITAA 1997)). In both cases, if the non-resident beneficiary is a corporate tax entity, tax is imposed on the trustee at the corporate tax rate (paragraphs 28(a) and 28A(a) of the Rates Act). Paragraphs 28(a) and 28A(a) are being amended to reflect the fact that, for the 2023-24 income year, all corporate tax entities will be taxed at the same rate. [Schedule 1, items 15 and 16, paragraphs 28(a) and 28A(a) of the Rates Act]

1.47               Under the new tax system for managed investment trusts, the trustee of a managed investment trust is liable to pay tax on non-arm’s length income (section 275-605 of the ITAA 1997). The rate of tax that is payable is the headline corporate tax rate of 30 per cent (subsection 12(10) of the Rates Act). As the headline corporate tax rate is being reduced to 27.5 per cent, the rate of tax that the trustee of a managed investment trust is liable to pay on non-arm’s length income will also be reduced to 27.5 per cent in the 2023-24 income year. [Schedule 1, item 6, subsection 12(10) of the Rates Act]

Reducing the corporate tax rate to 27 per cent for the 2024-25 income year

1.48               The amendments in Part 6 of Schedule 1 to this Bill amend the Rates Act to reduce the corporate tax rate for corporate tax entities to 27 per cent for the 2024-25 income year. The 27 per cent rate will apply to:

•        the taxable income of ordinary corporate tax entities;

•        the standard component of taxable income of companies (other than life insurance companies) that are RSA providers;

•        the amount that exceeds the PDF component of taxable income of companies that become PDFs during an income year;

•        the ordinary class of taxable income of life insurance companies;

•        the taxable income of public trading trusts; and

•        the non-arm’s length income of managed investment trusts.

[Schedule 1, items 17 to 20, 23 and 24, subsections 12(10) and 23(2), paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates Act]

1.49               For non-profit companies, the shade-in limit will be reduced to $817 for the 2024-25 income year. [Schedule 1, item 21, paragraph 23(6)(b) of the Rates Act]

1.50               Therefore, for the 2024-25 income year, the rates of tax payable by a non-profit company will be:

•        first $416 of taxable income — nil;

•        taxable income between $416 and $817 — 55 per cent; and

•        taxable income above $817 — 27 per cent.

1.51               For all recognised medium credit unions, the rate of tax on taxable income exceeding $49,999 will be reduced to 40.5 per cent for the 2024-25 income year . [Schedule 1, item 22, subsection 23(7) of the Rates Act]

1.52               As the 27 per cent corporate tax rate will apply to all corporate tax entities for the 2024-25 income year, the amendments in Part 6 of Schedule 1 to this Bill will replace the amendments in Part 9 of Schedule 1 to the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 (the Enterprise Tax Plan Act). [Schedule 4, items 3 to 5]

Reducing the corporate tax rate to 26 per cent for the 2025-26 income year

1.53               The amendments in Part 7 of Schedule 1 to this Bill amend the Rates Act to reduce the corporate tax rate for corporate tax entities to 26 per cent for the 2025-26 income year. The 26 per cent rate will apply to:

•        the taxable income of ordinary corporate tax entities;

•        the standard component of taxable income of companies (other than life insurance companies) that are RSA providers;

•        the amount that exceeds the PDF component of taxable income of companies that become PDFs during an income year;

•        the ordinary class of taxable income of life insurance companies;

•        the taxable income of public trading trusts; and

•        the non-arm’s length income of managed investment trusts.

[Schedule 1, items 25 to 28, 31 and 32, subsections 12(10) and 23(2), paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates Act]

1.54               For non-profit companies, the shade-in limit will be reduced to $788 for the 2025-26 income year. [Schedule 1, item 29, paragraph 23(6)(b) of the Rates Act]

1.55               Therefore, for the 2024-25 income year, the rates of tax payable by a non-profit company will be:

•        first $416 of taxable income — nil;

•        taxable income between $416 and $788 — 55 per cent; and

•        taxable income above $788 — 26 per cent.

1.56               For all recognised medium credit unions, the rate of tax on taxable income exceeding $49,999 will be reduced to 39 per cent for the 2025-26 income year . [Schedule 1, item 30, subsection 23(7) of the Rates Act]

1.57               As the 26 per cent corporate tax rate will apply to all corporate tax entities for the 2025-26 income year, the amendments in Part 7 of Schedule 1 to this Bill will replace the amendments in Part 10 of Schedule 1 to the Enterprise Tax Plan Act. [Schedule 4, items 3 to 5]

Reducing the corporate tax rate to 25 per cent for the 2026-27 income year and for later income years

1.58               The amendments in Part 8 of Schedule 1 to this Bill amend the Rates Act to reduce the corporate tax rate for corporate tax entities to 25 per cent for the 2026-27 income year and for later income years. The 25 per cent rate will apply to:

•        the taxable income of ordinary corporate tax entities;

•        the standard component of taxable income of companies (other than life insurance companies) that are RSA providers;

•        the amount that exceeds the PDF component of taxable income of companies that become PDFs during an income year;

•        the ordinary class of taxable income of life insurance companies;

•        the taxable income of public trading trusts; and

•        the non-arm’s length income of managed investment trusts.

[Schedule 1, items 33 to 36, 39 and 40, subsections 12(10) and 23(2), paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates Act]

1.59               For non-profit companies, the shade-in limit will be reduced to $762 for the 2026-27 income year and for later income years. [Schedule 1, item 37, paragraph 23(6)(b) of the Rates Act]

1.60               Therefore, for the 2026-27 income year and for later income years, the rates of tax payable by a non-profit company will be:

•        first $416 of taxable income — nil;

•        taxable income between $416 and $762 — 55 per cent; and

•        taxable income above $762 — 25 per cent.

1.61               For all recognised medium credit unions, the rate of tax on taxable income exceeding $49,999 will be reduced to 37.5 per cent for the 2026-27 income year and for later income years . [Schedule 1, item 38, subsection 23(7) of the Rates Act]

1.62               As the 25 per cent corporate tax rate will apply to all corporate tax entities for the 2025-26 income year and for later income years, the amendments in Part 8 of Schedule 1 to this Bill will replace the amendments in Part 11 of Schedule 1 to the Enterprise Tax Plan Act. [Schedule 4, items 3 to 5]

Consequential amendments

1.63               Schedules 2 to 4 make consequential amendments to the income tax law to reflect the extension of the reduction in the corporate tax rate to all corporate tax entities. In particular, these consequential amendments modify:

•        provisions relating to the operation of the imputation system;

•        provisions relating to the tax offset available to life insurance policyholders;

•        provisions relating to the operation of the carry forward tax offset rules;

•        examples which illustrate the operation of various provisions in the income tax law; and

•        the definition of standard corporate tax rate for the purposes of the operation of the diverted profits tax.

Operation of the imputation system

1.64               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.

1.65               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 corporate tax rate for imputation purposes .

1.66               The corporate tax rate for imputation purposes is defined in subsection 995-1(1) to mean, generally, 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.

1.67               In the 2023-24 income year, the corporate tax rate will be 27.5 per cent for all corporate tax entities. As a consequence, Schedule 2 to this Bill makes numerous technical amendments to the company imputation system to ensure that the company imputation system reflects the single corporate tax rate for all corporate tax entities (including the removal of the definition o f corporate tax rate for imputation purposes ). [Schedule 2, items 1 to 28, sections 36-55, 197-45, 197-60, 197-65, 200-25, 202-55, 202-60, 203-50, 215-20, 705-90, 707-310, 976-1, 976-10, 976-15 and the definitions of ‘corporate tax gross-up rate’ and ‘corporate tax rate’ in subsection 995-1(1) of the ITAA 1997]

Life insurance policyholders

1.68               If an ordinary life insurance policyholder receives the proceeds of a life insurance policy because the policy matures, section 26AH of the ITAA 1936 applies to include some or all of the proceeds in the policyholder’s assessable income in some circumstances. The amount that is included in assessable income depends on how long the policy has been held, generally as outlined in Table 1.2.

Table 1.2 : Life insurance policy proceeds that are assessable

Period policy held by policyholder

Amount of proceeds included in policyholder’s assessable income

8 years or less

100 per cent of the investment component

9 years

Two-thirds of the investment component

10 years

One-third of the investment component

More than 10 years

Nil

1.69               If an amount is included in a policyholder’s assessable income under section 26AH of the ITAA 1936, the policyholder may be entitled to a tax offset under section 160AAB. The tax offset applies to the eligible section 26AH amount . The amount of the tax offset is calculated by reference to the statutory percentage , which is based on the rate of tax paid by the life insurance company on the ordinary component of the company’s taxable income.

1.70               The rate of tax paid by life insurance companies on the ordinary component of the company’s taxable income will be reduced to 27.5 per cent in the 2023-24 income year (when the corporate tax rate is aligned for all companies). Consistent with other companies, the rate will then be cut to:

•        27 per cent for the 2024-25 income year;

•        26 per cent for the 2025-26 income year; and

•        25 per cent for the 2026-27 income year and later income years.

[Schedule 1, items 13, 23, 31 and 39, paragraph 23A(a) of the Rates Act]

1.71               When the rate of tax paid by life insurance companies on the ordinary component of the company’s taxable income has been reduced on previous occasions, the tax offset available under section 160AAB has also been reduced, but with a one year delay.

1.72               Therefore, consistent with this practice, the statutory percentage for working out the tax offset in relation to the eligible section 26AH amount of an ordinary life insurance policyholder will be the rate specified in Table 1.3.

Table 1.3 : Statutory percentage for life insurance policyholders

Income year

Statutory percentage

2002-03 or a later income year before 2024-25

30 per cent

2024-25

27.5 per cent

2025-26

27 per cent

2026-27

26 per cent

2027-28 and later income years

25 per cent

[Schedule 3, item 1, definition of ‘statutory percentage’ in subsection 160AAB(1) of the ITAA 1936]

Operation of the carry forward tax offset rules

1.73               Sections 65-30 and 65-35 of the ITAA 1997 relate to the operation of the tax offset carry forward rules. Consequential amendments are made to sections 65-30 and 65-35 to reflect:

•        the alignment of the corporate tax rate at 27.5 per cent for all corporate tax entities in the 2023-24 income year; and

•        the subsequent reduction in the corporate tax rate from 27.5 per cent to 25 per cent for the 2026-27 income year and for later income years.

[Schedule 3, items 6, 7, 13, 14, 20, 21, 27 and 28, subsections 65-30(2) and 65-35(3A) of the ITAA 1997]

Updating examples in the income tax law

1.74               A number of examples in the income tax law which illustrate the operation of certain provisions reflect the current headline corporate tax rate. In particular:

•        subsection 36-17(5) of the ITAA 1997 contains an example of the operation of section 36-17, which specifies how corporate tax entities can deduct tax losses;

•        subsections 36-55(1) and (2) of the ITAA 1997 contain examples relating to the operation of section 36-55, which specifies how excess franking offsets can be converted into corporate tax losses in some circumstances; and

•        subsection 115-280(3) of the ITAA 1997 contains an example of the operation of section 115-280, which allows deductions for certain shareholders who receive dividends from listed investment companies in some circumstances.

1.75               Consequential amendments will update the examples in subsection 36-17(5), 36-55(1), 36-55(2) and 115-280(3) to reflect:

•        the alignment of the corporate tax rate at 27.5 per cent for all corporate tax entities in the 2023-24 income year; and

•        the subsequent reduction in the corporate tax rate from 27.5 per cent to 25 per cent for the 2026-27 income year and for later income years.

[Schedule 3, items 2 to 5, 8 to 12, 15 to 19, 22 to 26 and 29, examples in subsections 36-17(5), 36-55(1), 36-55(2) and 115-280(3) of the ITAA 1997]

Operation of the diverted profits tax

1.76               The Treasury Laws Amendment (Combating Multinational Tax Avoidance) Act 2017 (the Combating Multinational Tax Avoidance Act) amended the income tax law to introduce the diverted profits tax. Item 7 of Schedule 1 to the Act amends the definition of standard corporate tax rate in subsection 177A(1) of the ITAA 1936 to reflect the alignment of the corporate tax rate at 27.5 per cent for all corporate tax entities in the 2023-24 income year. A note to that definition specifies that the item commences on 1 July 2023, at the same time as Part 2 of Schedule 4 to the Enterprise Tax Plan Act.

1.77               As this Bill will give effect to the alignment of the corporate tax rate at 27.5 per cent for all corporate tax entities in the 2023-24 income year, a technical amendment is made to the Combating Multinational Tax Avoidance Act so that the note to the definition of standard corporate tax rate specifies that item 7 of Schedule 1 to that Act will commence when Part 1 of Schedule 2 of this Bill commences. [Schedule 4, items 1 and 2, definition of ‘standard corporate tax rate in subsection 177A(1) of the ITAA 1936]

Application and transitional provisions

Extension of the 27.5 per cent corporate tax rate to all corporate tax entities

1.78               Parts 1 to 4 of Schedule 1 to this Bill amend the Rates Act to extend the lower 27.5 per cent corporate tax rate to all corporate tax entities by the 2023-24 income year by raising the aggregated turnover threshold which applies to determine whether a corporate tax entity is a base rate entity that qualifies for the lower 27.5 per cent corporate tax rate annually.

1.79               These amendments, and associated consequential amendments, commence and apply in four stages, as outlined in Table 1.4.

Table 1.4 : Commencement and application of increases in aggregated turnover to qualify for the 27.5 per cent corporate tax rate

The increase in aggregated turnover to this amount:

commences on:

and applies to:

$100 million

1 July 2019

[Subsection 2(1), table item 2]

the 2019-20 income year and later income years. [Schedule 1, subitem 41(1)]

$250 million

1 July 2020

[Subsection 2(1), table item 3]

the 2020-21 income year and later income years. [Schedule 1, subitem 41(2)]

$500 million

1 July 2021

[Subsection 2(1), table item 4]

the 2021-22 income year and later income years. [Schedule 1, subitem 41(3)]

$1 billion

1 July 2022

[Subsection 2(1), table item 5]

the 2022-23 income year and later income years. [Schedule 1, subitem 41(4)]

1.80               Part 5 of Schedule 1 to this Bill amends the Rates Act to extend the 27.5 per cent corporate tax rate to all corporate tax entities. These amendments, and associated consequential amendments in Schedule 2, apply from the 2023-24 income year. [Schedule 1, subitem 41(5); Schedule 2, item 29]

1.81               The amendments in Part 5 of Schedule 1, and associated consequential amendments in Schedules 2 and 3, commence on 1 July 2023. [Schedule 1, subsection 2(1), table items 6, 11 and 13]

1.82               The amendments to the Combating Multinational Tax Avoidance Act in Schedule 4 to this Bill, which modify the diverted profits tax to reflect the alignment of the corporate tax rate at 27.5 per cent for all corporate tax entities in the 2023-24 income year, will commence on 4 April 2017 — that is, immediately after the commencement of the Combating Multinational Tax Avoidance Act. [Schedule 1, subsection 2(1), table item 17]

Reduction in the corporate tax rate to 25 per cent by the 2026-27 income year

1.83               Parts 6 to 8 of Schedule 1 amend the Rates Act to reduce the corporate tax rate for all corporate tax entities in stages to 25 per cent by the 2026-27 income year.

1.84               These amendments, and associated consequential amendments, commence and apply in three stages, as outlined in Table 1.5.

Table 1.5 : Commencement and application of amendments to reduce the corporate tax rate to 25 per cent in stages

The reduction in the corporate tax rate to:

commences on:

and applies to:

27 per cent

1 July 2024

[Subsection 2(1), table items 7 and 14]

the 2024-25 income year and later income years. [Schedule 1, subitem 41(6)]

26 per cent

1 July 2025

[Subsection 2(1), table items 8 and 15]

the 2025-26 income year and later income years. [Schedule 1, subitem 41(7)]

25 per cent 

1 July 2026

[Subsection 2(1), table items 9 and 16]

the 2026-27 income year and later income years. [Schedule 1, subitem 41(8)]

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Reduction in the corporate tax rate

1.85               This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

1.86               Schedule 1 to this Bill amends the Rates Act to progressively extend the lower 27.5 per cent corporate tax rate to all corporate tax entities by the 2023-24 income year. The corporate tax rate will then be cut, for all corporate tax entities, to:

•        for the 2024-25 income year — 27 per cent;

•        for the 2025-26 income year — 26 per cent; and

•        for the 2026-27 income year and later income years — 25 per cent.

1.87               Schedules 2 to 4 make consequential amendments to the income tax law to reflect the extension of the reduction in the corporate tax rate to all corporate tax entities.

Human rights implications

1.88               This Bill does not engage any of the applicable rights or freedoms.

Conclusion

1.89               This Bill is compatible with human rights as it does not raise any human rights issues.





Schedule 1:  Reducing the corporate tax rate

Bill reference

Paragraph number

Items 1 to 4, paragraph 23AA(b) of the Rates Act

Table 1.1

Items 5 and 12

1.45

Item 6, subsection 12(10) of the Rates Act

1.47

Items 7 to 9, 13 and 14, subsection 23(2), paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates Act

1.41

Item 10, paragraph 23(6)(b) of the Rates Act

1.42

Item 11, subsection 23(7) of the Rates Act

1.44

Items 13, 23, 31 and 39, paragraph 23A(a) of the Rates Act

1.70

Items 15 and 16, paragraphs 28(a) and 28A(a) of the Rates Act

1.46

Items 17 to 20, 23 and 24, subsections 12(10) and 23(2), paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates Act

1.48

Item 21, paragraph 23(6)(b) of the Rates Act

1.49

Item 22, subsection 23(7) of the Rates Act

1.51

Items 25 to 28, 31 and 32, subsections 12(10) and 23(2), paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates Act

1.53

Item 29, paragraph 23(6)(b) of the Rates Act

1.54

Item 30, subsection 23(7) of the Rates Act

1.56

Items 33 to 36, 39 and 40, subsections 12(10) and 23(2), paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates Act

1.58

Item 37, paragraph 23(6)(b) of the Rates Act

1.59

Item 38, subsection 23(7) of the Rates Act

1.61

Subsection 2(1), table items 6, 11 and 13

1.81

Subsection 2(1), table item 17

1.82

Subitems 41(1), 41(2),  41(3) and 41(4)

Table 1.4

Subitem 41(5); Schedule 2, item 29

1.80

Subitem 41(6), 41(7) and 41(8)

Table 1.5

Schedule 2:  Main consequential amendments relating to imputation

Bill reference

Paragraph number

Items 1 to 28, sections 36-55, 197-45, 197-60, 197-65, 200-25, 202-55, 202-60, 203-50, 215-20, 705-90, 707-310, 976-1, 976-10, 976-15 and the definitions of ‘corporate tax gross-up rate’ and ‘corporate tax rate’ in subsection 995-1(1) of the ITAA 1997

1.67

Schedule 3:  Other consequential amendments

Bill reference

Paragraph number

Item 1, definition of ‘statutory percentage’ in subsection 160AAB(1) of the ITAA 1936

27.5

Items 2 to 5, 8 to 12, 15 to 19, 22 to 26 and 29, examples in subsections 36-17(5), 36-55(1), 36-55(2) and 115-280(3) of the ITAA 1997

1.75

Items 6, 7, 13, 14, 20, 21, 27 and 28, subsections 65-30(2) and 65-35(3A) of the ITAA 1997

1.73

Schedule 4:  Other amendments

Bill reference

Paragraph number

Items 1 and 2, definition of ‘standard corporate tax rate in subsection 177A(1) of the ITAA 1936

1.77

Items 3 to 5

1.52, 1.57, 1.62