Base Rate Entity: Turnover Test, Passive Income, and Tax Rate

A base rate entity is an Australian company that pays corporate tax at 25% instead of 30%, and it earns that rate by passing two tests every income year: aggregated turnover under $50 million, and no more than 80% of assessable income coming from passive sources such as dividends, interest, rent, and royalties.¹ Both conditions have to be met. Pass one and fail the other, and the company pays the full 30%.

Status is reassessed year by year. A company that qualifies this year can lose the rate next year if turnover grows or its income mix drifts toward investment returns, and the shift also changes the franking credits it can attach to dividends.

The $50 Million Turnover Test

Aggregated turnover is not just the company’s own revenue. Under section 328-115 of the Income Tax Assessment Act 1997, it combines the annual turnover of the company with the turnover of every entity connected with it and every affiliate, and then strips out revenue from transactions between those related parties so the same dollar is not counted twice.²

An entity is connected with your company where one controls the other, or where both are controlled by the same third party. Control exists when the controlling party, together with its affiliates, holds interests carrying the right to at least 40% of any income or capital distribution, or at least 40% of the voting power in a company.³ Affiliates are individuals or entities that act, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you in business affairs. Two partners are not automatically each other’s affiliates simply because of the partnership.

The calculation is done at the end of the income year using actual figures for that year. Prior-year turnover has no bearing on the current year’s status, and unexpected late-year revenue can push a company over the line.⁴ Forgetting to include overseas connected entities or affiliates is one of the most common errors the ATO flags in this calculation.⁵

The 80% Passive Income Test

Sitting under $50 million is necessary but not enough. No more than 80% of the company’s assessable income for the year can be “base rate entity passive income,” commonly shortened to BREPI.¹ Cross 80% and the company pays 30% on everything, regardless of its size. The test separates genuinely active trading businesses from companies that are essentially investment vehicles.

The passive income calculation has to be run even when turnover is well below the threshold. Skipping it because turnover is low is a mistake the ATO specifically warns against.⁵

What Counts as Passive Income

Section 23AB of the Income Tax Rates Act 1986 lists the income types that make up BREPI. Law Companion Ruling LCR 2019/5 sets out how each category works:⁶

Dividends and distributions from corporate tax entities, along with any attached franking credits. Non-portfolio dividends are excluded: a dividend is non-portfolio where the recipient holds at least 10% of the voting power in the paying company, which lets corporate groups move funds between related companies without generating passive income.⁷
Non-share dividends, meaning payments on certain hybrid instruments treated as dividends for tax purposes.
Interest from bank accounts, loans, and securities. Exceptions apply for entities whose core business is lending: financial institutions, registered entities providing finance commercially, holders of an Australian credit licence, and financial services licensees whose licence covers dealings in securities. Interest that is a return on an equity interest in a company is also excluded.
Royalties for the use of intellectual property.
Rent from real estate holdings.
Gains on qualifying securities, being returns from certain discounted or deferred-interest instruments.
Net capital gains calculated under the standard capital gains rules. This includes gains on assets used in the business, even where those assets qualify as “active assets” for small business CGT concession purposes. The ATO has flagged this as a point businesses regularly get wrong.⁵

Classification turns on the nature of the income, not its geographic source. Foreign dividends, overseas rental income, and interest from offshore accounts fall into the same categories, and a dividend from a foreign subsidiary is tested against the non-portfolio exclusion in the same way as a domestic one.⁶

Trust and Partnership Distributions

When a company receives income as a beneficiary of a trust or a partner in a partnership, that income is BREPI to the extent it traces back to one of the passive categories. If a trust earns both rent and trading income, the company’s distribution is split: the portion referable to rent counts as BREPI, and the trading portion does not.⁶ Where there is a chain of trusts or partnerships, this tracing runs at every level, and expenses have to be allocated fairly between income types at each tier.

The 80% Cliff

The passive income test is binary. A company at 79% passive income pays 25% on everything. A company at 81% pays 30% on everything. No sliding scale, no partial rate. That means a single transaction near year end can flip the result: selling an investment property in June, for example, can push net capital gains high enough to breach the threshold. Companies sitting near the line need to watch the ratio through the year, not just at tax time.

The Rate and What It Saves

From the 2021–22 income year onward, a company that qualifies pays 25% on its entire taxable income. Every other company pays 30%.⁴ No further changes are currently legislated, so these rates apply for the 2025–26 income year and beyond until Parliament amends them.

The five-percentage-point gap makes correct classification worth real money. On $1 million of taxable income, the difference is $50,000 a year.

How It Changes Franking Credits

Base rate entity status also drives the franking credits the company can attach to its dividends. Franking credits represent tax the company has already paid, and they let shareholders avoid being taxed twice on the same income. The maximum credit a company can allocate to a dividend depends on its “corporate tax rate for imputation purposes,” which is a separate figure from the rate the company actually pays on its taxable income.⁸

The Look-Back Rule

To work out the imputation rate, the company assumes its aggregated turnover, assessable income, and BREPI are the same as the previous income year, then applies the current year’s tax rate thresholds.⁸ If the company was a base rate entity on last year’s numbers, its imputation rate is 25%. If it was not, the rate is 30%. A company that did not exist in the previous income year is treated as a base rate entity for imputation purposes.⁴

The look-back creates a mismatch when status changes. A company that paid 30% last year but qualifies as a base rate entity this year still franks this year’s dividends at the 30% imputation rate. Going the other way, a company that was a base rate entity last year but loses that status this year is stuck franking at 25% even though it now pays 30%, which traps credits in the franking account until the look-back catches up.

Maximum Credit at Each Rate

Applying the ATO’s formula produces two figures worth knowing:⁸

At a 25% imputation rate, a $100 fully franked dividend carries a maximum franking credit of $33.33.
At a 30% imputation rate, the same $100 dividend carries a credit of $42.86.

That difference matters to shareholders. A company that moves from 30% to 25% delivers noticeably smaller credits on the same dividend, and companies that lose base rate entity status sometimes face shareholder pressure to lift dividend amounts to compensate.

Franking Account Deficits

If a company’s franking account is in deficit at the end of the income year, it is liable for franking deficit tax equal to the shortfall, and it has to lodge a franking account return and pay the tax by the last day of the month after its income year ends.⁹ Franking deficit tax can generally be offset against future income tax liabilities, so the money comes back over time, but the short-term cash flow hit can be significant for smaller businesses. Over-distributing franked dividends relative to the tax actually paid is the usual way companies land in deficit, and the risk is higher when the imputation rate has recently changed.

Reassessing Each Year

Base rate entity status is not permanent. The ATO is explicit that companies must reassess eligibility every income year and should not assume last year’s result still applies.⁵ Changes in turnover, income mix, or group structure can all flip the outcome, and applying the wrong rate on a return can bring shortfall penalties and interest charges.

The ATO’s published guidance highlights several recurring errors:⁵

Leaving connected or affiliated entities out of aggregated turnover, particularly overseas ones. Every connected entity and affiliate has to be included wherever it operates.
Skipping the passive income calculation because turnover is below $50 million. Both tests are required.
Excluding net capital gains from BREPI on the assumption that gains on business assets are “active.” They are not, and they count.
Missing rent, royalties, interest, or dividends when tallying BREPI.
Carrying last year’s status into this year. Prior-year turnover has no relevance to current-year eligibility.

Getting the classification wrong in either direction causes problems. Applying 25% when you owe 30% creates a shortfall, interest, and possible penalties. Applying 30% when you qualify for 25% means overpaying tax and potentially over-franking dividends relative to your correct imputation rate. Both errors cascade into the franking account and can take more than a year to unwind.

1
BarNet Jade. Income Tax Rates Act 1986 – Meaning of Base Rate Entity
2
Australian Taxation Office. TD 2021/7
3
Australian Taxation Office. TD 2022/6
4
Australian Taxation Office. Changes to Company Tax Rates
5
Australian Taxation Office. Tips to Get Your Base Rate Entity Status Correct
6
Australian Taxation Office. LCR 2019/5 – Base Rate Entities and Base Rate Entity Passive Income
7
Australian Taxation Office. Deduction for Non-Portfolio Dividends for Resident Company
8
Australian Taxation Office. Allocating Franking Credits
9
Australian Taxation Office. Franking Deficit Tax