MONTHLY TAX TIP – What tax rate applies to bucket companies in the 2022 income year?

July 2022

A ‘corporate tax entity’ (broadly, a company or entity taxed as a company) that qualifies as a base rate entity is subject to a lower tax rate. 

The base rate entity tax rate is 25% for the 2022 and later income years (reduced from 26% in the 2021 income year). 

For all other corporate tax entities, the standard corporate tax rate of 30% continues to apply in the 2022 and later income tax years.

A company will be a base rate entity for the 2022 income year (and taxed at the lower rate), if:

• the company’s aggregated turnover for the income year is less than $50 million; and
• 80% or less of the company’s assessable income for the year is ‘base rate entity passive income’.

‘Base rate entity passive income’ broadly includes dividends (as well as any associated franking credits), rent, interest, royalties, net capital gains, gains on qualifying securities and any such income that is distributed to a company from a trust or a partnership.

Where a company’s only source of income is a distribution received from a related discretionary trust (i.e., the company is a ‘bucket company’), tax professionals are required to ‘look through’ to the trust’s underlying income when determining whether the company is a base rate entity for the 2022 income year. 

To the extent that a trust distribution consists of base rate entity passive income, it will be treated as such in the hands of the company.

For example, a company’s only source of income for the 2022 income year may be a discretionary trust distribution comprised of business income (70%) and rental income (30%).  In these circumstances the company will be a base rate entity (assuming its aggregated turnover for the year is less than $50 million).  This is because only 30% of the company’s assessable income is base rate entity passive income (i.e., the extent to which the trust distribution consists of rental income), which is not more than 80%.

Accordingly, the company is taxed at the 25% tax rate in the 2022 income year.