Paying the wrong company tax rate can cost real money.

Many business owners still get caught on one point. They assume their company is “small”, so it must qualify for the lower rate. That isn’t how the rules work.

If you’re checking Base rate entity rules Australia for the 2026 income year, the practical question is simple. Does your company qualify for 25%, or does it fall back to 30%?

Key Takeaways

• Base rate entities can access the 25% company tax rate
• You must satisfy two tests
• The tests focus on aggregated turnover and passive income
• Connected entities are a common trap
• Your company tax rate also affects franking credits

What Is a Base Rate Entity in Australia

A base rate entity is a company that qualifies for the lower company tax rate.

From the 2021–22 income year onwards, eligible companies have been taxed at 25% instead of the standard 30%, under the ATO’s company tax rate rules. The earlier rules were phased down over time, including 27.5% in 2017–18 with a $25 million threshold, before expanding further under later changes, as set out by the ATO company tax rate changes guidance.

That sounds straightforward, but the label creates confusion. Many owners think “base rate entity” is a separate business structure. It isn’t. Your company is still a company. The term only determines which tax rate applies for that income year.

Why this matters in practice

The gap between 25% and 30% affects more than the tax return.

It can influence:

• Cash flow planning because the company may retain more after tax
• Dividend planning because the franking rate follows the company’s tax rate
• Year-end decisions about income mix and group structure
• Compliance risk if the wrong rate is used in the return

Practical rule: Treat base rate entity status as an annual tax test, not a permanent badge your company keeps forever.

If you run a trading company, the core issue is whether you satisfy the eligibility rules for that year. If you want help with the company side of your structure, see this guide on company accounting support.

Current Company Tax Rates for 2026

A company with $500,000 of taxable income pays $125,000 at 25%, or $150,000 at 30%. That $25,000 gap is why owners need to get the rate right before the return is lodged.

For the 2026 income year, Australia still applies two company tax rates.

Australian Company Tax Rates (2025-2026 Income Year)	Applicable Tax Rate
Base rate entity	25%
Other companies	30%

The rate itself is simple. The difficulty is working out which rate your company is entitled to use for that year.

In practice, I see the problem most often in family groups with more than one entity. A trading company may look small on its own, but once you account for connected entities, the group position can change quickly. That is where many SME clients apply 25% too early, then have to fix the tax return, franking position, or year-end estimates later.

Use the 25% rate only after checking eligibility for that income year, especially if the business added a new entity, restructured ownership, or started earning more investment-style income.

The Two Key Eligibility Tests for the 25% Rate

For the 2026 income year, a company qualifies as a base rate entity only if it passes both tests.

Aggregated turnover test

Your company’s aggregated turnover must be below $50 million for the income year. Many directors make mistakes on this point. The test doesn’t only look at the turnover inside one company. It can also include turnover from connected entities and affiliates.

A common pitfall is missing related businesses in the calculation. If one business has $40m turnover and a connected family company adds $15m, the combined figure goes over the $50m threshold, and the company doesn’t qualify for the 25% rate, as explained in this guide on base rate entity turnover and connected entities.

What usually goes wrong

Owners often look at the trading entity in isolation.

That approach fails when the business group includes:

• Family companies with common control
• Related service entities
• Investment entities linked to the same decision-makers
• Affiliate businesses that need to be counted under the turnover rules

A company can look small on its own and still fail the turnover test once the wider group is counted.

This issue comes up regularly in family business structures. If your setup includes multiple entities, restructuring advice often matters more than tax software or bookkeeping tidy-ups. For that reason, it’s worth reviewing your position through a proper business structuring advice process.

Passive income test

The second test looks at the type of income your company earns.

No more than 80% of assessable income can be base rate entity passive income. If passive income goes over that threshold, the company doesn’t qualify, even if turnover is under $50 million.

Passive income can include:

• Interest
• Dividends other than certain dividends from connected entities
• Royalties
• Rent
• Net capital gains from non-trading assets

This rule exists to stop passive investment vehicles from accessing the lower company tax rate just because they sit inside a company.

Two useful examples

The rule is easier to understand with real examples already used in the guidance.

• Happy Feet Pty Ltd has $100,000 in trading income and $4,000 in interest. Total income is $104,000, and passive income is 3.8%. That stays well below the 80% limit, so the company qualifies for the 25% rate.
• Coffee and Cake Pty Ltd has $70,000 trading income and $28,000 rental income. Its passive income is 28.6%, so it also qualifies.

What works and what doesn’t

What works is reviewing the income mix before lodgement and understanding whether rent, interest, dividends, or asset-based gains are pushing the company toward the passive income limit.

What doesn’t work is calling everything “business income” and hoping the label fixes the issue. The character of the income matters.

How to Determine Your Company Tax Rate Step-by-Step

A practical review is better than guessing. Use this order.

1. Work out aggregated turnover Start with the company’s turnover, then check whether connected entities or affiliates must be included.
2. Sort income into active and passive categories Interest, rent, royalties, dividends, and some capital gains need close review.
3. Calculate the passive income percentage Compare passive income against total assessable income for the year.
4. Apply both tests together Passing one test isn’t enough. The company must satisfy both.
5. Confirm the tax rate before lodgement Don’t wait until the return is drafted if the company also pays dividends or manages year-end tax planning.

Review the tax rate before finalising accounts, not after. Fixing the rate late can create extra work across tax, dividends, and shareholder records.

Worked example

Take a simple company scenario.

If a company has turnover below the turnover limit and only a modest share of its assessable income is passive, it may qualify for the lower rate. If that same company earns mostly passive income, it can fail the test even though the turnover position still looks fine. Consider these practical scenarios:

• Scenario one The company carries on an active business. Passive income sits comfortably below the passive income limit. Result: it may qualify for 25%.
• Scenario two The company’s assessable income is mostly passive, such as rent, interest, or investment returns. Result: it can fall into the 30% rate.

One detail many owners miss is that the base rate entity test is applied to the actual facts for the income year. A company that qualified last year may not qualify this year if turnover changed, a related entity was added, or the income mix shifted.

Common Pitfalls and How to Avoid Them

The errors are usually predictable. The problem is that they’re often noticed too late.

Mistake and fix list

• Misclassifying passive income Rent, interest, dividends, royalties, and non-trading asset gains need to be reviewed properly. Fix it by coding income correctly and checking the tax treatment before year-end finalisation.
• Ignoring connected entities This is common in family groups. Fix it by mapping the full structure, not just the entity that trades.
• Using last year’s rate automatically A prior result doesn’t lock in the next year. Fix it by reassessing eligibility every income year.
• Forgetting the tax rate affects dividends The company tax rate links to franking treatment. Fix it by checking the tax rate before issuing or planning distributions.

Base rate entity checklist

Copy and use this before lodgement:

• Aggregated turnover calculated
• Connected entities and affiliates reviewed
• Passive income identified correctly
• Passive income percentage checked
• Correct company tax rate applied
• Dividend and franking implications reviewed
• Working papers retained
• Annual reassessment completed

Clean bookkeeping helps, but it doesn’t replace a tax review. The base rate entity decision is a tax classification exercise, not just an accounting one.

What works is doing this review while decisions can still be made. What doesn’t work is trying to rebuild the logic after the return has already been prepared.

How Base Rate Status Affects Franking Credits

A common year-end problem looks like this. The company has made a profit, the owners want to declare a dividend, and everyone assumes the franking position is straightforward. Then the base rate entity review changes the answer.

If the company is taxed at 25% for the year, its maximum franking rate is tied to that rate. That means the dividend may carry fewer franking credits than shareholders expected, particularly where owners were budgeting on a 30% company tax outcome.

Why this matters in practice

For small business owners, this is not just a technical tax point. It affects how much cash can be distributed, what shareholders need to set aside for their own tax, and whether a proposed dividend still makes sense after the franking result is checked.

The issue shows up often in family groups with more than one entity. A trading company may qualify as a base rate entity after applying the turnover and passive income tests, while the owners still assume franking works the same way it did in a prior year. That assumption can create avoidable surprises when dividend statements are prepared.

Practical review points include:

• The company’s franking rate for the year
• Whether shareholder expectations are based on the wrong tax rate
• The timing of any dividend declaration
• Whether retained earnings should be distributed now or later

I usually review this before any dividend is declared, not after. Once distributions are documented, fixing a franking mistake is harder and often more expensive.

For owner-managed companies, the better approach is to check the company tax outcome and the shareholder impact together as part of a broader business tax planning review. That is especially important where connected entities can change the base rate entity result from one year to the next.

Frequently Asked Questions about Base Rate Entities

Is a base rate entity the same as a small business entity

No. They’re different tax concepts.

A company can be treated as a base rate entity for company tax purposes only if it passes the relevant turnover and passive income tests.

What is the company tax rate Australia 2026

For the 2026 income year, the two relevant rates are 25% for a base rate entity and 30% for other companies.

Does every company under the turnover threshold get the 25% rate

No.

The turnover test is only one part of the analysis. The passive income test must also be satisfied.

What counts as passive income

The key categories include interest, rent, royalties, dividends in certain cases, and net capital gains from non-trading assets.

Do investment or holding companies usually qualify

Sometimes they do not, because their income can be mostly passive.

The answer depends on the actual income mix for the year, not the label on the company.

Do I test eligibility once or every year

Every year.

A company’s tax rate can change from one income year to the next if turnover or income composition changes.

If my company has related entities, should I be concerned

Yes.

Connected entities and affiliates are one of the most overlooked parts of the turnover test, especially in family business groups.

Can rental income cause a problem

It can.

Rental income may count toward passive income, so a company with significant rent needs careful review.

Does the lower company tax rate always mean a better overall tax outcome

Not automatically.

The company may pay tax at a lower rate, but shareholder outcomes and franking consequences still need review.

What should I do before lodging

Check the group turnover position, classify income properly, confirm the passive income percentage, and make sure the company tax rate and dividend treatment align.

If you want clear advice on whether your company qualifies for the lower rate, Nanak Accountants and Associates can help you review your structure, income mix, tax return position, and dividend planning before lodgement. This article is general information only for Australia. It doesn’t consider your objectives, financial situation or needs. Rules and thresholds can change, so check current ATO, ASIC and ABR guidance and seek professional advice before acting.