A Base Rate Entity (BRE) is a term used in the Australian tax system. It helps decide the corporate tax rate that a company has to pay. The Australian Taxation Office (ATO) uses this concept to separate small and medium businesses from larger ones.
In simple words, if a company’s income and activities meet certain rules, it is called a base rate entity and can enjoy a lower company tax rate. This helps small and growing businesses save money and invest more in their operations.
2. What is a Base Rate Entity?
A Base Rate Entity is a company that meets two main conditions in a financial year:
- Its aggregated turnover (total income including related businesses) is below a set limit.
- No more than 80% of its total income comes from passive income, such as rent, interest, or dividends.
If both these conditions are met, the company qualifies as a base rate entity and can pay tax at a lower rate than the standard corporate rate.
3. Why Was the Base Rate Entity Concept Introduced?
The Australian government introduced the base rate entity system to:
- Support small and medium enterprises (SMEs)
- Encourage business growth and job creation
- Simplify the tax structure by replacing the earlier “small business entity” tax rules
By giving smaller businesses a lower tax rate, the government helps them keep more profits for reinvestment.
4. Conditions to Qualify as a Base Rate Entity
To be treated as a base rate entity, a company must satisfy both of the following:
a. Turnover Threshold
The company’s aggregated turnover must be less than $50 million in the 2023–24 income year.
(This threshold has increased over time — from $25 million in 2017–18 to $50 million now.)
b. Passive Income Test
The company must earn 80% or less of its total income from passive sources.
Passive income includes:
- Rent
- Interest
- Dividends
- Royalties
- Net capital gains
If the company earns more than 80% of its income from these sources, it cannot be a base rate entity.
5. Base Rate Entity Tax Rate
The corporate tax rate for base rate entities is lower than the general company rate.
Income YearBase Rate Entity Tax RateGeneral Company Tax Rate2017–1827.5%30%2018–1927.5%30%2019–2026%30%2020–21 onward25%30%
So, from 2021 onwards, companies that qualify as base rate entities pay 25% tax, while others pay 30%.
6. Example of a Base Rate Entity
Let’s look at an example:
XYZ Pty Ltd is an Australian company with:
- An aggregated turnover of $20 million
- Income from business operations (90%)
- Income from passive sources (10%)
Since its turnover is below $50 million and passive income is less than 80%, XYZ Pty Ltd qualifies as a base rate entity and will pay 25% corporate tax instead of 30%.
7. How to Check If a Company Qualifies
To find out if your company is a base rate entity, follow these steps:
- Calculate your total turnover – include all connected and affiliated entities.
- Check the 80% rule – ensure your business income is more than 20% of total income.
- Confirm your company type – only companies (not trusts or partnerships) can qualify.
If both conditions are satisfied, your company can enjoy the lower 25% tax rate.
8. Benefits of Being a Base Rate Entity
Being a base rate entity has many advantages:
- Lower tax rate (25%) – saves money and increases net profit.
- Better cash flow – more funds remain in the business.
- Encourages growth – companies can invest more in innovation, jobs, and expansion.
- Simpler compliance – easier rules than older small business tax systems.
9. Key Differences Between a Base Rate Entity and a Standard Company
FeatureBase Rate EntityStandard CompanyTax Rate25%30%Turnover Limit< $50 millionNo limitPassive Income≤ 80%Any levelMain FocusSmall to medium active businessesLarge or investment-based companies
10. Common Mistakes Businesses Make
Many companies miss out on lower tax rates because of simple errors. Some common mistakes include:
- Not checking passive income ratio properly
- Including income from unrelated entities incorrectly
- Not updating accounting records on time
- Misunderstanding “aggregated turnover” (it includes connected entities, not just one company)
Businesses should consult a tax advisor or accountant to confirm their base rate entity status.
11. Changes and Updates
The base rate entity rules have changed several times since their introduction in 2017. The key update is the permanent 25% tax rate for all qualifying companies from 2021 onwards.
Businesses should regularly check ATO updates because any change in the definition or threshold could affect their tax rate.
12. Conclusion
The Base Rate Entity (BRE) system is a fair and simple way to give smaller businesses a tax advantage in Australia. If your company earns most of its income from active business and has a turnover below $50 million, you can qualify for the 25% tax rate.
Understanding these rules helps businesses save money, stay compliant, and grow faster.
13. FAQs
Q1. What is a base rate entity in simple terms?
A base rate entity is a company that earns most of its income from business activities (not passive sources) and has a turnover below $50 million.
Q2. What tax rate applies to base rate entities?
Base rate entities pay 25% corporate tax, while other companies pay 30%.
Q3. What is considered passive income?
Passive income includes rent, dividends, interest, royalties, and capital gains.
Q4. Can trusts or partnerships be base rate entities?
No. Only companies can qualify as base rate entities under ATO rules.
Q5. Why is the base rate entity rule important?
It helps small and medium businesses by reducing their tax burden, allowing them to grow and invest more.
