Changes to Business Tax Rates: What You Should Know

The 25% Lower Company Tax Rate

This applies to companies meeting specific eligibility criteria, offering significant savings compared to the standard rate. To qualify as a base rate entity for the 2025 income year, your company must meet two critical tests: an aggregated turnover below $50 million and no more than 80% of assessable income from passive income sources.

The aggregated turnover threshold has remained stable at $50 million since the 2018-19 financial year, providing certainty for business planning. However, the passive income test continues to catch many business owners off guard, particularly those with mixed revenue streams including rental income, dividends, or capital gains.

The 30% Full Company Tax Rate

This applies to all companies that don’t qualify as base rate entities. This includes companies exceeding the $50 million annual turnover threshold or those deriving more than 80% of their assessable income from passive income sources such as interest, dividends, rent, royalties, and capital gains.

Key Eligibility Requirements for Base Rate Entities

Understanding base rate entity passive income is essential for determining your company tax rate eligibility. The Australian Taxation Office defines passive income broadly to include corporate distributions and credits, royalties and rent, interest income (with some exceptions for superannuation funds), gains on qualifying securities, net capital gains, and income from partnerships or trusts that’s traceable to passive income sources.

• The 80% Passive Income Test creates a clear threshold that many businesses don’t realise they’re approaching. For example, a property development company earning significant rental income while properties remain unsold might find itself exceeding the 80% threshold and losing access to the reduced tax rate. Similarly, companies holding substantial investments alongside their trading activities need careful monitoring of their income mix.

• Aggregated Turnover Assessment occurs annually, meaning your previous year’s annual revenue is irrelevant for current year eligibility. This provides both opportunities and risks – a company that exceeded $50 million last year might qualify for the lower company tax rate this year if annual turnover drops, whilst a growing business might lose eligibility despite historical qualification.

Non-portfolio dividends receive special treatment under the rules, with dividends from companies where you hold at least 10% voting power not counting as passive income. This exception helps holding companies maintain base rate entity status when receiving dividends from subsidiaries.

Recent Changes to Individual Income Tax Rates Affecting Sole Traders

The July 2024 individual income tax rates changes have delivered significant benefits to sole traders and partnership businesses. These changes represent the most substantial personal income tax reform in recent years, directly impacting unincorporated businesses.

• Tax Rate Reductions include the 19% rate dropping to 16% for taxable income between $18,201 and $45,000, and the 32.5% rate reducing to 30% for taxable income between $45,001 and $135,000. For sole traders, these reductions can result in tax savings of over $2,000 annually for those earning $100,000.

• Threshold Increases have also provided relief, with the 37% rate threshold rising from $120,000 to $135,000, and the 45% rate threshold increasing from $180,000 to $190,000. This means sole traders can earn more before reaching higher tax rates.

• Future Tax Cuts are already planned, with the 16% rate reducing to 15% from 1 July 2026 and further dropping to 14% from 1 July 2027. These changes will provide additional annual savings of $268 in 2026-27 and $536 from 2027-28 for workers earning more than $45,000.

The tax free threshold remains at $18,200, meaning the first $18,200 of personal income for sole traders continues to be tax free. The Medicare levy of 2% applies to most taxpayers earning above $23,226, with higher thresholds for families and seniors.

Small Business Tax Concessions and Thresholds

Small businesses continue to benefit from various concessions designed to reduce compliance costs and improve cash flow. These concessions have different eligibility thresholds, requiring careful assessment of which benefits apply to your specific situation.

• The $20,000 Instant Asset Write-Off has been extended through to 30 June 2025 for small business entity with aggregated turnover under $10 million. This concession allows immediate tax deductions for eligible assets including equipment, machinery, and vehicles, providing immediate cash flow benefits rather than depreciation over time.

  Assets costing $20,000 or more can be placed in the Small Business Simplified Depreciation Pool, where they’re depreciated at 15% in the first year and 30% in subsequent years. If your pool balance falls below $20,000 at year-end, you can claim tax deductions for the entire remaining balance.

• Small Business Income Tax Offset provides up to $1,000 annually for sole traders, partners, and trust beneficiaries with business income from entities having aggregated turnover under $5 million. This offset helps bridge the gap between individual and company tax treatment.

• Capital Gains Tax Concessions remain available for businesses with aggregated turnover under $2 million, including the 15-year exemption, 50% active asset reduction, retirement exemption up to $500,000, and rollover relief for reinvestment. These concessions can significantly reduce the capital gains tax burden when selling business assets or the entire business.

Recent Compliance and Administrative Changes

Several administrative changes in 2025 have increased compliance requirements and cost for businesses that don’t stay on top of their tax obligations.

• Mandatory Monthly Goods and Services Tax Reporting now applies to approximately 3,500 small businesses with compliance issues from 1 April 2025. Affected businesses must maintain monthly reporting for at least 12 months before requesting return to quarterly lodgement, representing a significant increase in administrative burden.

• Removal of Tax Deductible Status for Australian Taxation Office Interest Charges from 1 July 2025 means General Interest Charge and Shortfall Interest Charge are no longer tax deductible. With interest rates around 11%, this change makes tax debts significantly more expensive and removes the previous partial offset through tax deductions.

• Proposed Goods and Services Tax Threshold Increase to $250,000 from the current $75,000 is under consideration for implementation from 1 July 2025. This change would reduce compliance burden for many small businesses but may affect their ability to claim goods and services tax credits on purchases.

The goods and services tax continues to apply at 10% on most goods and services, with various exemptions for essential items like basic food, health services, and educational courses. Businesses with annual turnover exceeding the threshold must register for goods and services tax and include it in their tax return.

State-Based Payroll Tax Changes

Payroll tax obligations vary by state and continue to evolve, with several jurisdictions introducing surcharges for larger employers. Payroll tax is calculated on total wages paid to employees and represents a significant cost for businesses with substantial employee numbers.

• Australian Capital Territory has introduced payroll tax surcharges from 1 July 2025, with an additional 0.5% for businesses with Australia-wide wages above $50 million and 1.0% for those above $100 million. The standard Australian Capital Territory rate remains 6.85% on wages above the $2 million annual threshold.

• Victoria increased its payroll tax threshold from $900,000 to $1,000,000 from 1 July 2025, whilst maintaining the phase-out for employers with wages between $3 million and $5 million. Victorian businesses with national payrolls above $10 million face combined surcharges of up to 2%.

• New South Wales maintains its $1.2 million threshold and 5.45% rate for 2025-26, with proportional thresholds applying to businesses operating across multiple states.

Fringe benefits tax may also apply to certain employee benefits provided by employers, calculated at 47% of the taxable value of benefits. This includes items like company cars, entertainment, and low-interest loans to employees.

Planning Strategies for Tax Rate Changes

Understanding these changes allows for strategic tax planning that can deliver significant savings whilst ensuring full compliance with Australian Taxation Office requirements.

• Income Timing Strategies become particularly important for businesses approaching base rate entity thresholds. Companies near the $50 million aggregated turnover threshold or 80% passive income threshold should carefully monitor their income mix and consider timing of transactions to improve their tax rate eligibility.

• Business Structure Reviews may be warranted given the tax rate changes. Sole traders benefiting from individual income tax rates cuts need to compare their effective tax rates with company structures, particularly as their businesses grow toward the aggregated turnover threshold.

  Different business structures offer various advantages and disadvantages. A sole trader operates as an individual with unlimited personal liability, whilst a company operates as a separate legal entity with limited liability protection. The choice between structures affects how much tax you pay, your tax obligations, and your business goals.

• Cash Flow Management becomes more critical with non-deductible Australian Taxation Office interest charges. Businesses should prioritise tax payments and consider payment plans to avoid costly interest charges that can no longer be offset through tax deductions.

Companies should also consider timing of expenses and tax deductions to improve their taxable income across financial years. This includes accelerating deductible expenses before year-end or deferring income where possible.

Conclusion

The landscape of business tax rates continues to evolve, with 2025 bringing both opportunities and challenges for Australian businesses. The two-tier company tax system provides significant benefits for eligible base rate entities, whilst individual income tax rates cuts offer relief to sole traders and partnerships. However, increased compliance requirements and the removal of tax deductible status for Australian Taxation Office interest charges mean that staying on top of your tax obligations has never been more important.

Whether you’re operating as a sole trader, partnership, or company, understanding how these changes affect your specific situation is crucial for improving your tax position. The choice of business structure affects not only how much tax you pay but also your ongoing tax obligations and compliance requirements.

At ACT Tax Group, we help businesses understand these complex changes and implement strategies that minimise tax whilst ensuring full compliance. Contact our team to discuss how these changes might affect your business and what steps you can take to improve your tax position for 2025 and beyond.