Tax Laws Amendment (Small Business Measures No. 1) Act 2015

The Tax Laws Amendment (Small Business Measures No. 1) Act 2015 is a Commonwealth Act that amended tax legislation. Its central change was to reduce the corporate tax rate for a company that is a small business entity for a year of income from 30% to 28.5%.

The Act also extended that 28.5% rate to trustees of corporate unit trusts and public trading trusts where the trust is a small business entity for the relevant year. Beyond the headline rate cut, it made a series of consequential amendments so other tax calculations would work properly in a system where not every company was taxed at the same rate.

The amendments apply to assessments for years of income starting on or after 1 July 2015. That timing matters. This page is most useful when you are looking at the 2015-16 income year or checking how the law changed at that point. If you are dealing with a later year, you should confirm whether later legislation changed the threshold, rate or related rules.

The Act directly applies to three main categories of taxpayers:

First, companies. The amended Income Tax Rates Act 1986 provides that if a company is a small business entity for a year of income, the rate of tax on its taxable income is 28.5%. Otherwise, the rate remains 30%, unless other special provisions apply.

Second, trustees of corporate unit trusts. The Act inserted a matching rule so the trustee pays tax at 28.5% on relevant net income if the trust is a small business entity for the year, and 30% otherwise.

Third, trustees of public trading trusts. The same 28.5% and 30% split applies depending on whether the trust is a small business entity for the year of income.

The Act also adjusted special calculations for non-profit companies and recognised medium credit unions, and it changed a range of formulas and definitions in the tax law that refer to the corporate tax rate.

Importantly, this is not a general tax cut for every business structure. Sole traders and ordinary partnerships are not directly taxed as companies under these provisions. A business owner operating as an individual or through a standard partnership should not assume this Act gave them a 28.5% tax rate.

The practical trigger point is whether the entity is a small business entity for the year of income. The amended rate provisions are written on a year-by-year basis. That means the question is not whether the business was once small, or whether it expects to stay small. The question is whether it qualifies for that particular income year.

For the 2015-16 year, small business entity status generally depended on the tax law definition, commonly involving aggregated turnover of less than $2 million. Aggregated turnover can require you to look beyond the entity lodging the return and consider affiliates and connected entities. That is one reason businesses often get this wrong when they only look at the turnover of a single company.

You should also be careful not to carry assumptions forward into later years. This Act changed the law as at 2015, but later legislation may have changed thresholds or rates. If you are preparing or reviewing a return for a later year, check the current law for that year rather than relying on the 2015 settings.

The clearest practical change was the new 28.5% rate for eligible small business entities. For companies, the amended subsection 23(2) of the Income Tax Rates Act 1986 split the rate into two outcomes: 28.5% if the company is a small business entity for the year of income, and 30% otherwise.

The Act made equivalent changes for trustees of corporate unit trusts and public trading trusts. That matters for businesses using those structures, because the lower rate was not limited to incorporated companies.

The Act also amended special rules for non-profit companies and recognised medium credit unions. For non-profit companies, the tax cap rule was adjusted so the upper taxable income amount differs depending on whether the company is a small business entity. For recognised medium credit unions, the maximum tax payable percentage above the threshold amount was reduced from 45% to 42.75% where the entity is a small business entity.

Just as importantly, the Act updated a range of provisions in the Income Tax Assessment Acts so formulas and definitions would no longer assume a single 30% corporate rate in every case. The amendments refer in places to the corporate tax rate and in other places to the standard corporate tax rate. That distinction matters when working through carried forward tax offsets, franking-related provisions and other calculations that depend on the company tax rate used by the legislation.

This Act was not only about changing one number from 30% to 28.5%. It also amended multiple provisions in the Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997 and the Income Tax Rates Act 1986 so related tax calculations would still operate correctly.

The official text shows amendments to provisions dealing with carried forward tax offsets, net exempt income reductions, franking-related formulas, gross-up concepts, and definitions of corporate tax rate and standard corporate tax rate. It also amended a provision dealing with company beneficiaries in the Income Tax Rates Act 1986.

For a business, the practical lesson is to review the documents and systems that actually produce the tax outcome. That can include tax return workpapers, accounting software settings, franking account processes, trust tax calculation templates, and any internal tax manuals or precedent spreadsheets that still assume a flat 30% company rate.

The Act does not create a separate registration or notification process. The practical obligation is to apply the correct tax law to the correct taxpayer for the correct income year. In real terms, that means identifying whether the entity is within the structures covered by the Act, determining whether it is a small business entity for that year, and then using the correct rate and related formulas in the assessment process.

Businesses should keep records showing how eligibility was assessed, especially where aggregated turnover depends on related entities. If the entity is a trust covered by the Act, the trustee should ensure the trust's status has been checked rather than assuming the company rules apply automatically. If the business is not a company or one of the specified trust types, it should avoid applying the 28.5% rate simply because it considers itself a small business.

Where a business has non-profit company status, medium credit union status, or franking consequences, extra care is needed because the Act changed more than the headline rate. A wrong assumption can flow through to multiple calculations.

The Act received Royal Assent on 22 June 2015. Sections 1 to 3, Schedule 1 Part 1, Schedule 1 Part 2 Division 1, and Schedule 1 Part 3 commenced on Royal Assent. Schedule 1 Part 2 Division 2 had a linked commencement tied to another 2015 Act, with the published commencement table recording 1 July 2015.

The application rule is especially important. The amendments made by Schedule 1 apply to assessments for years of income starting on or after 1 July 2015. So even though most provisions commenced on Royal Assent, the tax effect is tied to income years starting on or after 1 July 2015.

The Act remains in force. However, this page should not be used as a substitute for checking later amendments. Company tax rates and small business thresholds have changed over time, so the correct answer depends on the income year you are dealing with.

The most common mistake is treating the 28.5% rate as a universal small business rate. It was not. The Act applies directly to companies and certain trust structures, and only where the entity is a small business entity for the relevant year.

Another common mistake is failing to reassess eligibility each year. The legislation is framed by reference to a year of income, so a business can move in or out of the lower rate depending on turnover and related entity relationships.

A third mistake is updating the headline tax rate but not the supporting calculations. Because the Act amended related formulas and definitions, businesses should check whether franking, offsets, carried forward amounts or trust calculations also need to be updated.

Before relying on this page, confirm the income year, the entity type, the small business entity test for that year, and whether later legislation has changed the threshold or rate.