Company Tax Rate: 25% or 30%? The Base Rate Entity Test

Your company pays 25% if it's a base rate entity for the income year, and 30% if it isn't (as at September 2026). To be a base rate entity you have to pass two separate tests in the same year: aggregated turnover under $50 million, and base rate entity passive income of 80% or less of assessable income. Most trading companies clear both without thinking about it — the ones that get caught out are holding companies, property companies, corporate beneficiaries, and otherwise ordinary businesses that had a big one-off capital gain.

The two tests, and you have to pass both

There's no partial rate and no averaging. Your company either qualifies for 25% on every dollar of taxable income, or it pays 30% on every dollar.

Two things trip people up here. First, the tests are applied year by year, so a company can be on 25% one year and 30% the next. Second, the passive income test uses assessable income — your gross income before deductions — not your taxable income or your profit. A company can make a loss and still fail the test.

What counts as passive income

"Base rate entity passive income" (BREPI, if your accountant says it out loud) is a defined list, not a judgement call about whether income feels passive.

A non-portfolio dividend is a dividend a company receives from another company in which it holds a voting interest of at least 10%. That carve-out is what lets a holding company receive dividends from its own operating subsidiary without those dividends being treated as passive.

The rent trap

Rent is passive income for this test even when your company is genuinely in the business of renting things out. There's no active business exception. A company whose income is 90% commercial rent is running a real business with real work behind it — and it still pays 30%.

The same logic bites on trust distributions. If your company is the corporate beneficiary of a family trust and the trust's income was mostly interest, rent or dividends, that character flows through and counts against your 80% test.

The one-off capital gain

A net capital gain counts as passive income in the year it's realised. Sell the workshop, sell a rental unit the company owned, or sell out of a shareholding, and a normally comfortable trading company can fail the 80% test for that single year — pushing the whole year's taxable income, including trading profit, to 30%. It's worth modelling the numbers before a big sale settles rather than finding out at lodgement.

Worked example: a trading company

Bathurst Joinery Pty Ltd, 2026-27:

• Cabinetry and installation income: $840,000
• Interest on the business savings account: $6,000
• Rent from subletting half the workshop: $24,000

Assessable income is $840,000 + $6,000 + $24,000 = $870,000. Passive income is $6,000 + $24,000 = $30,000, which is 3.4% of assessable income. Aggregated turnover is nowhere near $50 million. Both tests pass, so the rate is 25%.

On taxable income of $180,000 after deductions:

• At 25%: $45,000 company tax
• At 30%: $54,000 company tax
• Difference: $9,000

That $9,000 isn't a permanent saving if the profit is paid straight out to shareholders — franking credits square most of it up at the individual level. It's a real saving on profit the company retains and reinvests.

Worked example: an investment company

Wattle Holdings Pty Ltd, 2026-27:

• Rent from two commercial units: $140,000
• Interest: $8,000
• Consulting fees from the director's advisory work: $30,000

Assessable income is $178,000. Passive income is $140,000 + $8,000 = $148,000, which is 83.1% — over the line. Wattle Holdings pays 30% on all of it, including the consulting income.

On taxable income of $95,000:

• At 30%: $28,500
• At 25% (if it had qualified): $23,750
• Cost of failing the test: $4,750

For Wattle to pass on those passive figures, assessable income would need to reach $185,000, because $148,000 is exactly 80% of $185,000. That means active income of $37,000 rather than $30,000 — an extra $7,000 of consulting work. Useful to know, but don't manufacture income purely to shift a tax rate; the ATO looks at whether transactions are commercially real.

What aggregated turnover actually means

Aggregated turnover is your company's annual turnover plus the annual turnover of any entity that is your affiliate or connected with you, with dealings between those entities excluded so nothing is counted twice. It exists to stop a business splitting itself across several entities to slip under a threshold.

For a standalone company with one or two shareholders and no other businesses, aggregated turnover is simply your own turnover. If you run a trading company, a service entity and a property company under common control, you add them up.

At $50 million this test is rarely the problem for a small business. The 80% passive income test is what actually decides the rate for the companies that fail. Be careful not to confuse the $50 million base rate entity threshold with the $10 million small business entity threshold that governs most other concessions — they're different tests with different numbers, and passing one tells you nothing about the other. Our company structure guide covers what else changes once you're running a Pty Ltd, from setup costs to director duties.

Franking: last year's numbers decide this year's rate

This is the part that catches out even careful owners. The rate you tax profits at and the rate you frank dividends at are worked out differently.

To find your corporate tax rate for imputation purposes — the franking rate — you assume this year's aggregated turnover, assessable income and passive income are the same as last year's. So the 2025-26 figures determine how you frank a dividend paid in 2026-27. A brand new company that didn't exist in the previous year franks at 25%.

The practical consequence: a company can be taxed at 30% this year because of a capital gain, while still franking its dividends at 25%. Or the reverse. Don't assume the two rates match.

Here's what the difference looks like on a $60,000 fully franked dividend:

Attach credits above your maximum and you've over-franked, which triggers over-franking tax and doesn't top up your franking account. Attach less and you under-frank, which debits your franking account for credits nobody received. Neither is fatal, but both are avoidable with a five-minute check before the dividend is declared. Our guide to paying yourself from a company walks through wages, dividends and Division 7A loans.

Common misunderstandings

"My company is small, so it gets 25%." Size isn't the test. A two-person property company with $200,000 of rent fails on passive income; a company with $40 million of trading revenue passes.

"Only the active part gets taxed at 25%." No. The rate applies to your whole taxable income. You either qualify or you don't.

"I'm a sole trader, so I get 25%." The company rate applies to companies. Sole traders and partners pay individual marginal rates on business profit, though the small business income tax offset can reduce the tax on that profit by 16%, capped at $1,000 a year.

"My trust pays 25%." A trust isn't taxed at a company rate. Income distributed to beneficiaries is taxed in their hands — and if a company is one of those beneficiaries, the character of what it receives feeds into its own 80% test.

"The rate covers everything I invoice through the company." If the personal services income rules apply to what you do, that income can be attributed back to you and taxed at your marginal rates regardless of the company rate.

Before you lodge

Work out your status yourself rather than assuming last year's answer still holds:

1. Add up assessable income for the year, including any net capital gain.
2. Separate out rent, interest, royalties, dividends, franking credits and traceable trust distributions.
3. Divide passive by total. If it's 80% or less and aggregated turnover is under $50 million, you're a base rate entity.
4. Check last year's figures separately to confirm the franking rate on any dividend you've paid or plan to pay this year.
5. Keep the workings. The ATO expects records for five years, and a passive income calculation is exactly the sort of thing you'll be asked to reproduce.

If your rate changes, your PAYG instalments usually need a look too, because the ATO's instalment rate is based on your last assessed return and can lag a change in circumstances by a full year.

Key takeaways

• 25% applies only if aggregated turnover is under $50 million and 80% or less of assessable income is passive income — both tests, same year (as at September 2026).
• Passive income is a defined list: rent, interest, royalties, most dividends, franking credits, net capital gains and traceable trust distributions.
• Rent counts as passive even for a genuine rental business, which is why property companies commonly pay 30%.
• A one-off capital gain can push a normal trading company over the 80% line for that year, taxing all its trading profit at 30%.
• The franking rate is worked out on last year's figures, so it can differ from the rate you're actually taxed at.
• Status is tested every year — recheck it each time you prepare the company tax return.

Where to get help

The ATO's company tax rate pages at ato.gov.au set out the base rate entity tests, the passive income definition and the imputation rules, and its business bulletins cover the errors it sees most often. Your registered tax agent should be calculating the passive income percentage as part of preparing the company return; if you've had a property sale, a share sale or a trust distribution into the company this year, ask them to show you the figure before lodgement. You can check whether an adviser is registered on the Tax Practitioners Board register at tpb.gov.au. For free general support, the Australian Small Business and Family Enterprise Ombudsman at asbfeo.gov.au and your state's small business commissioner can point you to local advisory services.