You open the company tax return, see 30%, and pause. A colleague mentioned that smaller companies may qualify for a lower company tax rate, yet your notice doesn't reflect it. For many directors, that moment leads to the same question: what is a base rate entity, and why does it matter this year rather than last year?
A base rate entity is a company that may access the 25% company tax rate instead of the standard 30% rate, depending on whether it passes two annual tests set by the Australian Taxation Office company tax rate rules. The catch is that the answer often turns on details outside the company's own profit and loss, especially group turnover and passive income composition.
By Panbo Ye, CFP® | FCPA | SSA® | Founder, Everglow
Who this article is for: Australian company owners, directors, finance managers, and advisers who need to check whether a company may qualify for the concessional company tax rate for the current income year.
Is Your Company Paying the Right Amount of Tax?
A director at Castle Medical reviews the company's tax position and notices the assessment reflects 30%, not 25%. That usually means the company didn't qualify as a base rate entity for that income year, even if the business feels “small” in day-to-day terms.
Under the ATO rules, a base rate entity is a company that may use the 25% concessional company tax rate if it meets both tests for the year: aggregated turnover must be less than $50 million, and no more than 80% of assessable income can be base rate entity passive income. For companies that don't meet those conditions, the standard rate is 30%. Current as at 07/2026.
That sounds simple. In practice, it isn't. The issue often isn't revenue alone, but how the ATO looks through connected structures and how income is classified.
For some owners, this is also the point where it's worth checking whether the company structure itself still fits the business, especially if the original setup was chosen quickly. A comparison of company versus sole trader structures in Australia can help frame that broader question.
Practical rule: Don't assume a lower company tax rate applies because turnover feels modest. The legal test is annual, mechanical, and stricter than most directors expect.
- The core benefit: A qualifying company may access the 25% company tax rate for the relevant income year.
- The core risk: A company can miss the lower rate because of group turnover or passive income, even where trading activity is genuine.
- The right lens: Check status fresh each year. Don't rely on last year's outcome.
Takeaway: A base rate entity is not a label a company carries forever. It's an annual tax outcome that depends on current year facts.
Defining a Base Rate Entity
The easiest way to think about a base rate entity is as a company that passes two gates for the year. If it passes both, it may use the lower company tax rate. If it fails either one, it falls back to the general company tax rate.
Many directors operate under the false assumption that the lower rate is attached to business size alone. It isn't. The rules are narrower than that, and they're aimed at active companies rather than entities whose income is mostly passive.
Below is a simple comparison.
Quick comparison of the two company tax outcomes.
| Attribute | Base Rate Entity | Other Companies |
|---|---|---|
| Company tax rate | 25% | 30% |
| Turnover requirement | Aggregated turnover less than $50 million | Does not satisfy the threshold or fails another test |
| Passive income requirement | Less than 80% of assessable income is BREPI | Passive income is 80% or more, or another requirement is not met |
| Typical profile | Active operating company meeting both tests | Larger groups or passive-income-heavy companies |
The annual check matters just as much as the thresholds. A company may qualify in one year and miss out in the next because a related entity was added, investment income increased, or a restructuring changed who controls what.
Where clients are still setting up or formalising an entity, company registration considerations often intersect with this tax question. The wrong assumptions at setup tend to create problems later, especially once a second entity is added.
What owners often miss
A company doesn't become a base rate entity by election. There's no box you tick to opt in if the facts don't support it.
What works is disciplined year-end review. What doesn't work is assuming the accountant can “apply the lower rate” after the fact if the structure or income mix never qualified.
- Status is conditional: The lower rate depends on passing both tests for the relevant year.
- Status is not automatic: A company may be active and still fail because of passive income composition or group turnover.
- Status needs evidence: Good records around related entities and income sources matter.
Takeaway: What is a base rate entity in practical terms? It's a company that proves, for that year, that it is both under the turnover ceiling and below the passive income ceiling.
The Two Critical Tests for Eligibility
The law requires two tests to be satisfied together. Section 23AA of the Income Tax Rates Act 1986 sets the framework, and the current position is that a company must have aggregated turnover below $50 million and base rate entity passive income below 80% of assessable income. If passive income is 80% or more, the lower rate is denied and the company pays 30%. Prior year turnover doesn't decide the current year's result. Current as at 07/2026.
For some businesses, these tests also sit alongside broader classification issues, including whether the entity has grown into a more complex reporting environment. That separate question is outlined in large proprietary company definition guidance.
The aggregated turnover test
Aggregated turnover is broader than the company's own sales. It includes the turnover of the company plus connected entities and affiliates. That's where many assumptions fail.
A simple analogy helps. Think of the ATO looking at the economic family of the business, not just the single company shell. If control or affiliation links entities together, the turnover pool may be wider than directors expect.
- Own turnover counts first: Start with the company's annual turnover.
- Connected entities matter: Related companies within the control net may need to be added.
- Affiliates matter too: An entity may be relevant even if it sits outside the immediate corporate chart.
The passive income test
The passive income test asks what proportion of assessable income is base rate entity passive income (BREPI). The company must remain below 80% for the year.
BREPI includes categories identified in the verified material, including:
- Dividends: Excluding dividends where the company holds at least 10% voting power in the payer.
- Interest income: This is commonly overlooked where surplus cash accumulates.
- Rent and royalties: These often catch medical, property-adjacent, and licensing structures.
- Net capital gains: These can distort the ratio in a year with a significant disposal.
- Franking credits and certain corporate distributions: These form part of the passive income analysis.
The lower rate can disappear because of income composition, not just business scale.
A practical mistake is to review these categories only after year end. By then, there may be little room to manage transactions, distributions, or entity relationships sensibly.
- Look at proportion, not just amount: A relatively modest passive amount may still matter if total assessable income is low.
- Review unusual transactions early: Asset sales, distributions, and rental arrangements may affect the ratio.
- Test both hurdles together: Passing one test doesn't rescue failure on the other.
Takeaway: The base rate entity test is a dual lock. Turnover opens only one side. Income composition opens the other.
How Aggregated Turnover Trips Up Growing Businesses
Many growing businesses still assume only the company's own turnover matters. That assumption is one of the costliest errors in this area.
The ATO requires turnover to be aggregated across connected entities and affiliates, potentially pushing a business group beyond the $50 million threshold. The verified material also notes that this oversight has been a leading cause of lost base rate entity status in the 2024-25 period, particularly in professional services and construction sectors. Current as at 07/2026.
This catches owners who've built sensibly over time. One operating company becomes two. A spouse has a related entity. A service company sits beside the main trading vehicle. None of that looks unusual commercially, but tax law doesn't stop at the front door of a single ABN.
Why groups get this wrong
In practice, directors often organise by function. One entity invoices clients, another holds equipment, another employs staff, and another receives rent or licence fees. That can be entirely legitimate.
The trouble starts when nobody performs a full aggregation review before year end. A group chart prepared for banking or legal purposes isn't the same as a tax aggregation analysis.
A useful related concept is GST turnover, but it shouldn't be confused with aggregated turnover for this purpose. The labels sound similar. The tests are not interchangeable.
Watchpoint: If your business has multiple companies, trusts, or spouse-linked entities, assume nothing until the aggregation analysis is done.
What tends to work in practice
The better approach is deliberate and boring. It usually involves mapping every related entity, identifying who controls what, and checking whether any affiliate relationship exists in substance rather than by label alone.
What doesn't work is relying on management intuition. “That company is separate” may be true legally, yet still incomplete for the turnover rules.
- Group mapping: Maintain a current diagram of companies, trusts, and individuals with control influence.
- Annual review: Recheck aggregation every income year, especially after acquisitions, restructures, or new ventures.
- Income tracing: Don't separate turnover questions from passive income questions. The same entity map often drives both.
Takeaway: The overlooked issue isn't the tax rate itself. It's the aggregation rule that can pull multiple entities into one turnover test.
A Worked Example of Castle Medical's Tax Status
Rules are easier to apply when you can see the mechanics. Consider Castle Medical, a GP practice operating through a company in Epping, Sydney.
Castle Medical in Epping
Castle Medical Pty Ltd earns $4.5 million from patient fees during the year. It also receives $100,000 in rent from a pathology provider that sublets a consulting room inside the clinic. The directors also control a related service entity with turnover of $600,000.
The first lesson is immediate. Castle Medical can't test its own turnover in isolation. The related service entity has to be considered in the aggregated turnover review.
Where a practice is formalising its year-end position, accurate financial statement preparation usually becomes the foundation for this kind of assessment. Poor classification in the accounts tends to create poor tax conclusions.
Working through the two tests
Step 1: Aggregated turnover
Castle Medical's own turnover is $4.5 million. Add the related service entity turnover of $600,000. Aggregated turnover is $5.1 million.
That sits below the $50 million threshold, so the company passes the turnover test for this example.
Step 2: Passive income proportion
Assessable income includes the active patient fee income and the rent. Total assessable income in this simplified example is $4.6 million.
Passive income is the $100,000 rent component. That is well below 80% of assessable income, so the passive income test is also passed.
Step 3: Conclusion
On these facts, Castle Medical would qualify as a base rate entity for the year and may be taxed at 25%, subject to the full facts and proper classification.
This example also shows where businesses go wrong. If Castle Medical ignored the service entity, the answer would happen to be the same here. In other cases, that omission can flip the outcome entirely. If the rent were the dominant income source rather than incidental, the second test could become the primary issue.
- Why the example works: Active trading income is clearly dominant.
- Where caution is needed: Rent inside medical structures may still be passive income even where it feels operationally connected.
- What to do next in a real case: Reconcile the legal structure chart to the tax working papers before the return is lodged.
Takeaway: A worked example shows the proper discipline: calculate group turnover first, then test whether passive income stays below the line.
Answering Your Top Questions About Base Rate Entities
Base rate entity status is tested annually. The ATO states that eligibility depends on the actual aggregated turnover and passive income proportion for the specific income year, and prior year turnover is irrelevant. The ATO also notes that the former “carrying on a business” requirement was replaced from the 2017-18 income year onwards by the BREPI test. Current as at 07/2026.
Can a company be a base rate entity one year and not the next?
Yes. That's a normal outcome where current year turnover, related entity arrangements, or passive income mix changes. A company shouldn't assume continuity from the prior return. Each income year stands on its own facts.
Does a company still need to be carrying on a business to qualify?
Not in the old sense. The ATO guidance notes that the carrying on a business requirement was replaced by the passive income test from the 2017-18 income year onwards. The income composition now matters more than that former gateway.
If passive income is exactly 80%, does the company still qualify?
No. The threshold is strict. The company must have less than 80% of assessable income as BREPI. If passive income is 80% or more, the lower rate is denied.
Do prior year turnover figures help if this year is unusual?
No. Prior year turnover is irrelevant to determining current year base rate entity status. That often surprises owners who rely on historical size or trading patterns when the law requires a current year calculation.
What about franking credits?
Franking outcomes need careful review because company tax rate and franking consequences don't always align intuitively. The safer approach is not to assume the franking position from the trading result alone. Review the dividend planning against the company's tax profile before distributions are declared.
Does a trust or related entity affect my company's status?
It may, depending on control and affiliate relationships, and depending on how income flows are characterised. Under these circumstances, many apparently separate structures become connected for tax purposes, especially in family and professional groups.
Takeaway: The short answer to what is a base rate entity remains the same at the end as it was at the start: it's a company that satisfies both annual tests for that year, not a permanent badge based on size alone.
If you would like clarity on how these principles may apply to your own circumstances, contact Everglow on 1300 913 929 or email contact@everglow.au.
To book directly: Book a meeting with Panbo.
Want help applying this to your situation?
Every situation is different. Book a time with our team to talk it through, or call us on 1300 913 929.