For the 2016–2017 income year, the company tax rate for small businesses decreases to 27.5%. Companies with turnover of less than $10 million are eligible for this rate. The maximum franking credit that can be allocated to a frankable distribution has also been reduced to 27.5% for these companies. 

The reduced company tax rate of 27.5% will progressively apply to companies with turnover of less than $50 million by the 2018–2019 income year. The ATO says if a company lodged its 2016-17 company tax return early, and its turnover is less than $2 million, it will amend the return and apply the lower tax rate.

If the company's turnover is from $2 million to less than $10 million, the company will need to review its return and lodge an amendment if required.

2016–2017 tax rate change and over-franking

Legislation has now passed to apply a 27.5% corporate tax rate from 1 July 2016 for small business entities (SBEs) with aggregated turnover of under $10 million. The legislation also introduced a new formula for determining the maximum franking credit entitlement for a frankable distribution, which is generally based on the company's corporate tax rate for the income year.

Draft Practical Compliance Guideline PCG 2017/D7 notes that if an SBE fully franked a 2016–2017 distribution before 19 May 2017, the amount of the franking credit on members' distribution statements may be incorrect if it was based on the 30% corporate tax rate.

The draft guideline sets out a practical compliance approach that affected entities may use to inform members of the correct franking credit attached to their distributions, as an alternative to requesting ATO permission to amend the distribution statement. Affected entities are corporate tax entities that paid a fully franked (or close to fully franked) distribution at the 30% rate between 1 July 2016 (for normal balancers) and 18 May 2017, where the distribution was over-franked because of the newly reduced 27.5% tax rate.

When the draft guideline is finalised, it will apply from the first day of an entity's 2016–2017 income year (that is, 1 July 2016 for 30 June balancers).

Written notice informing members

The draft guideline allows affected entities to advise members in writing of their correct franking credit for the 2016–2017 income year without re-issuing the distribution statement. The written notice should contain the following details:

  • the name of the entity making the distribution and the member's name;
  • the amount of the distribution and the date it was made;
  • the fact that the initial distribution statement was incorrect;
  • the revised amount of franking credit allocated to the distribution, rounded to the nearest cent;
  • the franking percentage for the distribution, worked out to two decimal places; and
  • the amount of any withholding tax deducted from the distribution.

The notice can be provided electronically. Members must then use the notice to correctly report on their 2016–2017 tax return.

No administrative penalties

The draft guideline indicates that affected entities will not be penalised for an initial incorrect 2016–2017 statement if they give each member either:

  • written notice clearly showing the correct amount of the franking credit; or
  • a new distribution statement (after receiving ATO permission to amend the statement).