In the wake of Donald Trump’s cuts to US tax rates, which will see the corporate tax rate fall from 35% to 21%, there has been significant interest in whether the Australian Government should similarly reduce rates for businesses operating here.
Australia’s company tax rates for small businesses (being those with an aggregated turnover of less than $10 million) have already been reduced from 30% to 27.5%. The Turnbull Government intends to further decrease company tax rates to 25% and for this measure to be extended to include all companies over the next decade*.
So, are company tax cuts good for business and, more importantly, are they good for you?
The primary beneficiaries of a reduction to Australia’s company tax rate will actually be overseas investors, due to the way tax is handled in this country. Australian taxpayers, under our dividend imputation system, get a tax credit for the tax paid at the company level. Here we are taxed on all our income, including dividends, at our personal tax rates. Generally speaking, overseas investors pay tax on their dividends and do not get the credit for the tax already paid by the company. Therefore, if the tax rate on company profits (dividends) is reduced, Australian business shareholders get proportionately less tax credit for this and are therefore no better off. In contrast, foreign company shareholders will be better off as they do not receive tax credits for tax paid by the company.
However, if you are a business owner looking to grow by reinvesting funds back into your business, a reduced company tax rate does mean more funds can be retained in the company for future investment, as less has gone out in tax.
Ultimately, comparing headline company tax rates around the world is only one factor to be considered when setting up business in different domiciles. There are many other factors, such as skilled labour, legal matters, productivity, local regulations, economic stability, etc that savvy business owners will investigate before taking the leap.
No matter your business venture, starting with a comprehensive, well-structured business plan will stand you in good stead. Our business advisory service can get you started – contact us for an appointment today.
* https://www.ato.gov.au/Rates/Changes-to-company-tax-rates/