Company tax rate cut to offset Paid Parental Leave Levy
The Government has reconfirmed its commitment to a reduction in the corporate tax rate in this year’s Federal Budget. However, the benefit of any rate reduction for many companies will be offset by the Government’s previously proposed Paid Parental Leave (PPL) Levy.
The company tax rate will be reduced from its current rate of 30 per cent to 28.5 per cent with effect from income years beginning on or after 1 July 2015 and apply to all companies.
The reduction to the corporate tax rate should benefit many corporate businesses across all sectors, but in particular those smaller companies who will benefit from a much needed cash flow boost to support business activity and growth.
However, for a company with taxable income in excess of $5 million, any expected benefits from the rate cut will be largely offset by the imposition of the PPL Levy at the rate of a 1.5 per cent, to be imposed on the taxable income that exceeds $5 million. Effectively, for those companies subject to the PPL Levy, the total company tax take will remain close to 30 per cent. The following table illustrates the effective overall tax burden from 1 July 2015, assuming the PPL Levy is applied as proposed in the Coalition’s election policies:
Although the proposed reduction in the headline company tax rate is a step in the right direction to make Australia’s corporate tax rate more competitive, it fails to bring the tax rate in line with the OECD average (see table below) and the aspirations of Australia’s Future Tax System Review (the ‘Henry Review’) to have a corporate tax rate of 25 per cent. Whilst businesses should welcome this move in the right direction, there is clearly more work to be done to truly increase the level of business investment in Australia.
The change to the company tax rate and the imposition of the PPL Levy will have a number of consequential issues which need to be understood and managed once the finer details are known, including:
- impact on the company’s ability to frank dividends (also noting that the payment of the PPL Levy will most likely not generate franking credits)
- impact on the after-tax return on dividends paid to shareholders after 30 June 2015
- tax effect accounting implications
- tax consolidated groups will need to manage the payment of the PPL Levy and consider its impact on any tax sharing/funding arrangements, and
- managing PAYG instalment obligations that take into account the rate change particularly during the first year of application.