Your Australian company pays 25% if it is a base rate entity for that income year and 30% if it is not. For the 2021-22 income year onwards, a base rate entity is a company with aggregated turnover under $50 million whose base rate entity passive income is no more than 80% of its assessable income.
Ask most business owners what tax rate their company pays and you will hear “25%” or “30%” with roughly equal confidence. Both answers are right, for different companies. And getting it wrong doesn’t just affect your tax bill; it changes how much of your profit you can pass to shareholders tax-effectively.
This guide is part of our complete guide to business structures in Australia.
The rule that decides which rate applies is the “base rate entity” test, and it trips up more owners than almost any other part of company tax. This guide explains the two rates, how the test works, why your mix of income matters, and how the rate flows through to franking and dividends. It then works through six numbered examples with the percentages shown, so you can find the one that looks like your group. Mina Baselyous, the CPA and Chartered Tax Advisor behind Pinnacle Accounting & Advisory, runs this calculation across client structures every year.
The two company tax rates in Australia
Australia has two company tax rates:
- 25%: the lower rate, for companies that qualify as a “base rate entity”.
- 30%: the full rate, for every other company.
Unlike personal income tax, there are no brackets. A company pays a single flat rate on all of its taxable income: the whole question is simply which of the two rates applies to it. That is decided each year by the base rate entity test.
The 25% rate has applied to base rate entities from the 2021-22 income year onwards, and the $50 million aggregated turnover threshold has been in place since 2018-19, according to the ATO’s Changes to company tax rates guidance, last updated 4 September 2026.
What is a base rate entity?
Your company qualifies for the 25% rate in a given year if it meets both of these conditions:
- Aggregated turnover under $50 million: your company’s turnover plus that of any connected or affiliated entities.
- No more than 80% “base rate entity passive income”: meaning passive income is 80% or less of your assessable income.
Both conditions sit in section 23AA of the Income Tax Rates Act 1986. Fail either one and the company is taxed at 30% for that year. Because it is tested annually, and because aggregated turnover is worked out at the end of the year, the same company can move between the two rates from one year to the next as its income mix changes.
The passive income test: where it gets tricky
The turnover test is easy for most small businesses to satisfy. The one that catches people out is the passive income test.
Base rate entity passive income, or BREPI, is defined in section 23AB of the Income Tax Rates Act 1986. It is a closed list:
- Dividends and other corporate distributions, other than a non-portfolio dividend
- Franking credits attached to those distributions
- Non-share dividends
- Interest, royalties and rent
- Gains on qualifying securities
- Net capital gains
- A share of trust or partnership income, to the extent it traces back to one of the categories above
Here is the trap. A company that trades actively for most of its income is a base rate entity. But a company set up mainly to hold investments, a “bucket company” receiving trust distributions, or a company holding a rental property, can easily have more than 80% passive income, which pushes it to the 30% rate. So two companies owned by the same person can pay different rates depending entirely on what kind of income they earn.
This is why the way you use a bucket company needs to be thought through: the tax rate it pays affects the whole strategy. Our comparison of a family trust and bucket company goes deeper on this, and if you are holding profit inside a company rather than drawing it, our guide to retained earnings explains what that actually means on your balance sheet.
Not sure whether your company should be paying 25% or 30%?
Getting the rate, and the franking that follows it, right is exactly the kind of detail a proactive advisor should be across. At Pinnacle Accounting & Advisory we help Melbourne business owners structure their entities so profit flows efficiently. Book a consultation with Mina.
Book a ConsultationTrust income keeps its character when it reaches your company
Trust income does not become passive just because it passed through a trust. Section 23AB(1)(g) of the Income Tax Rates Act 1986 makes a company beneficiary’s share of trust net income base rate entity passive income only to the extent it is referable to an amount that was already passive in the trust.
That single rule settles most of the arguments we hear. If a trading trust distributes its business profit to a bucket company, that distribution is active income in the company’s hands, not passive, and it does not count towards the 80% ceiling. If a property trust distributes rent to the same company, it is passive all the way through. The character follows the money.
The ATO says the same thing in Law Companion Ruling LCR 2019/5 (consolidated 20 October 2021, and still current). Paragraph 17 states that a company assessed on a share of trust net income has passive income “to the extent that” the amount is referable to the trust’s own passive income. Paragraph 18 adds that where there is a chain of trusts, the test is applied at each level, so a sub-trust in the middle does not launder the character either.
One important exception runs the other way. A franked dividend that a trust receives and then streams to a corporate beneficiary is not a non-portfolio dividend of that company, because the dividend was not paid to a company holding at least 10% of the voting power in the paying company (LCR 2019/5, paragraph 20). So a dividend that would have been excluded from passive income had the company held the shares directly becomes passive income once it arrives via a trust. If your group holds shares inside a family trust, our guide to franking credits where a company is held in a family trust works through the related traps.
Six worked examples: 25% or 30%?
The test is arithmetic, not judgement. Add up assessable income, add up the part of it that is base rate entity passive income, and divide. If the answer is 80% or less and aggregated turnover is under $50 million, the company pays 25%. Every example below assumes turnover is comfortably under the threshold.
| Case | Assessable income | Passive income (BREPI) | BREPI % | Result |
|---|---|---|---|---|
| 1. Trading trust to bucket company | $400,000 | $0 | 0% | PASSES, 25% |
| 2. Own trading income plus trust rent | $700,000 | $200,000 | 28.6% | PASSES, 25% |
| 3. Mixed trust, proportionate share | $500,000 | $200,000 | 40% | PASSES, 25% |
| 4. Property trust to bucket company | $300,000 | $300,000 | 100% | FAILS, 30% |
| 5. A capital gain tips it over | $1,000,000 | $850,000 | 85% | FAILS, 30% |
| 6. Exactly on the line | $1,000,000 | $800,000 | 80% | PASSES, 25% |
Case 1. Trading trust to bucket company. The family trust runs the business. It distributes $400,000 of trading profit to Bucket Co, which has no other income. Every dollar traces back to the trust’s business income, so none of it is passive. BREPI is $0 of $400,000, or 0%. PASSES. 25%. This is the outcome most owners assume they have, and it is correct only when the trust earns nothing but business income.
Case 2. Own trading income plus trust rent. A cafe company earns $500,000 of its own trading income and also receives $200,000 of rent distributed from a trust that owns the building. Assessable income is $700,000; the rent is passive. BREPI is $200,000 of $700,000, or 28.6%. PASSES. 25%. This mirrors the ATO’s own “Coffee and Cake Pty Ltd” example on its company tax rate page (last updated 4 September 2026), which lands on the same 28.6%.
Case 3. Mixed trust, proportionate share. The trust’s net income is $1,000,000: $600,000 trading, $250,000 rent, $150,000 interest. Bucket Co is presently entitled to 50% of the trust’s distributable income, so it is assessed on $500,000. That $500,000 is attributed proportionately across every income type: $300,000 trading, $125,000 rent, $75,000 interest. BREPI is $200,000 of $500,000, or 40%. PASSES. 25%. Note what did not happen: the company did not get to take the trading income first.
Case 4. Property trust to bucket company. A property trust distributes $300,000 of rent to a company with no other income. Everything traces back to rent, which is passive. BREPI is $300,000 of $300,000, or 100%. FAILS. 30%. A company used purely as a landing pad for rent will almost always sit here.
Case 5. A capital gain tips it over. A software company earns $150,000 of trading income and makes an $850,000 net capital gain selling the office building it traded from. Assessable income is $1,000,000. A net capital gain is passive income under section 23AB(1)(f), even when the asset was an active business asset. BREPI is $850,000 of $1,000,000, or 85%. FAILS. 30%. This mirrors the ATO’s “SoftDev Pty Ltd” example. One transaction moved an active trading company to the full rate for the whole year.
Case 6. Exactly on the line. A company has $200,000 of trading income and $800,000 of passive income, so BREPI is exactly 80%. PASSES. 25%. People assume 80% fails. It does not. Section 23AA asks whether “no more than 80%” of assessable income is passive, so 80.0% is inside the test and 80.1% is outside it. The ATO reaches the same conclusion on identical facts in LCR 2019/5, Example 1.1, where a company with exactly 80% passive income is held to be eligible for the lower rate.
The streaming trap: your resolution does not fix the mix
A trustee cannot choose which type of income a company beneficiary receives, except for capital gains and franked distributions. Everything else is attributed proportionately, based on the company’s share of the trust’s distributable income. So a resolution that makes a bucket company entitled to “the net business income” does not stop the trust’s rent and interest flowing through with it.
The ATO sets this out in LCR 2019/5, Example 1.2. The Busy Trust earned $500,000 of business income, a $300,000 unfranked dividend and $200,000 of rent. The trustee resolved to make Company 1 presently entitled to the net business income specifically. It did not work. Because Company 1’s entitlement was $500,000 of a $1,000,000 pool, it was assessed on 50% of the trust’s net income, and that $500,000 was attributed as $250,000 business income, $150,000 unfranked dividend and $100,000 rent. Its passive income came out at 50%, not zero.
That proportionate approach is not an ATO invention. It is the principle the Full Federal Court applied in Commissioner of Taxation v Greenhatch [2012] FCAFC 84 (7 June 2012): a beneficiary’s share of trust net income under Division 6 is a proportionate share of the whole, not a slice traced to a particular class of receipt. Parliament later carved out two exceptions, capital gains and franked distributions, which can be streamed to a specifically entitled beneficiary under Subdivisions 115-C and 207-B of the Income Tax Assessment Act 1997. Nothing else can.
In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the mistake we see most often is a trustee resolving to send “only the business income” to the bucket company and assuming that settles the rate. It does not. The company is assessed on a proportionate slice of everything the trust earned that year, and if the trust holds property or a share portfolio alongside the business, that slice can be enough to push the company to 30%.
The practical fix is structural rather than clerical: separate the passive assets from the trading trust so the mix at the top is clean. That usually means more than one trust, or a company that holds the shares directly rather than through a trust. Our guides to the types of trusts used in Australia and family trust and interposed entity elections cover how those groups are usually built. For the other half of this story, how a holding company sits above a trading company and why a non-portfolio dividend changes the answer, read our guide to holding companies, tax and asset protection.
Why the rate affects franking and dividends
The company tax rate isn’t just about the company’s own bill: it sets the rate at which the company franks its dividends. A company that pays 25% tax will usually, though not always, frank dividends at 25%; one paying 30% usually franks at 30%. The exception is explained in the next section, and it matters.
That matters when profit is later paid out to shareholders. Franking credits pass on the tax the company has already paid, so shareholders aren’t taxed twice. A mismatch, for example, tax paid at 30% in an earlier year but dividends franked at 25% now, can leave franking credits trapped in the company. This is a genuinely fiddly area, and it is one of the reasons the rate question is worth getting right rather than guessing. If you are working out the most efficient way to get money out of the company, start with how to pay yourself from your company, and check the share classes you actually have on issue before you declare anything.
The imputation mismatch: 25% tax, 30% franking
A company’s tax rate and its franking rate are worked out from different years, so they can disagree. The rate you pay tax at uses this year’s figures. The rate you frank at, called the corporate tax rate for imputation purposes, is worked out by assuming your aggregated turnover, assessable income and passive income are the same as they were in the previous income year.
The ATO explains the mechanics under “Maximum franking credits” on its company tax rate page, and LCR 2019/5 works through it at paragraphs 53 to 70. The consequences are easy to picture:
- A company that failed the test last year because it sold a building, but is back to normal trading this year, pays tax at 25% and franks at 30%. It can attach more credits than it paid, which drains the franking account faster than it fills.
- A company that passed last year but tips over 80% this year pays tax at 30% and franks at 25%. Credits build up in the franking account that shareholders never see.
- A company with no previous income year is treated as a base rate entity for imputation purposes, so a brand new company franks at 25%.
In a group that runs a Division 7A loan account or a bucket company, this is worth checking before the dividend is declared, not after. The High Court’s decision in Bendel changed how unpaid present entitlements to a bucket company are treated, but it did not change the base rate entity test or the franking rate, and a company that has already converted a UPE to a complying loan still has to service it.
How the company rate fits your overall structure
The 25% company rate looks attractive next to the top personal marginal rate, and it is a big part of why so many business owners trade through a company. But a low company rate is only useful if the profit can then reach you, or be reinvested, efficiently. That is a structuring question, not just a rate question.
Whether a company is the right vehicle at all depends on where your business is heading, how much profit you retain versus draw, and how you want to protect assets. Our guides on company versus trust and structuring your business to build wealth work through those decisions, and ongoing tax planning is where the rate test actually gets applied each year. You can also check the current rates directly on the ATO’s company tax rate page.
Frequently Asked Questions
What is the company tax rate in Australia?
There are two company tax rates: 25% for a base rate entity and 30% for all other companies. A base rate entity has aggregated turnover under $50 million and no more than 80% passive income, so most active small companies pay the lower 25% rate.
What is a base rate entity?
A base rate entity is a company with aggregated turnover under $50 million where no more than 80% of its assessable income is passive, such as interest, dividends, rent or a net capital gain. These companies pay 25%; a company that fails either test pays the full 30% rate.
Does the company tax rate affect franking credits?
Yes, but not always at the same rate. A company franks its distributions using its corporate tax rate for imputation purposes, which is worked out using the previous income year’s aggregated turnover, assessable income and passive income. So a company can pay tax at 25% this year and still frank at 30%.
Does trust income distributed to a bucket company count as passive income?
Only to the extent the trust income was passive in the trust. Under section 23AB(1)(g) of the Income Tax Rates Act 1986 the character traces through, so a distribution referable to the trust’s trading profit is active income in the company, while a distribution referable to rent or interest is passive.
Is a company with exactly 80% passive income still a base rate entity?
Yes. Section 23AA of the Income Tax Rates Act 1986 requires that no more than 80% of assessable income is base rate entity passive income, so a company sitting on exactly 80% still qualifies for 25%. The ATO reaches the same conclusion in Law Companion Ruling LCR 2019/5, Example 1.1.
Is a company the most tax-effective structure?
Not always. A company caps tax at 25% or 30%, which suits retaining and reinvesting profits, but individuals may pay less at lower income levels and trusts add distribution flexibility. The best structure depends on your profit, risk and long-term goals.
General Advice Disclaimer: The information in this article is general in nature and does not constitute personal financial, tax, or legal advice. It has been prepared without taking into account your personal objectives, financial situation, or needs. Before acting on anything in this article, consider its appropriateness to your circumstances and seek advice from a registered tax adviser or CPA. Liability limited by a scheme approved under Professional Standards Legislation.
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