What Is a Base Rate Entity?

A base rate entity is a company that qualifies for the lower corporate tax rate. The concept was introduced as part of the Government's Enterprise Tax Plan, which progressively reduced the tax rate for small and medium businesses from 30% down to 25%.

The lower rate recognises that smaller companies face higher compliance costs relative to their income. The BRE rules apply to a much broader group than the old "small business entity" definition (which used a $10 million turnover threshold). With the $50 million threshold, many medium‑sized companies now benefit from the lower rate.

For FY 2025‑26, the BRE rate has reached its final target of 25%. This rate applies to the portion of the company's taxable income that is attributable to the base rate entity's operations, subject to the passive income test.

BRE Rate History (2017‑2026)

The BRE rate has been gradually reduced over several years. Here is the full trajectory from the beginning of the Enterprise Tax Plan through to the final 25% rate.

The rate reached 25% from the 2021‑22 income year onward and is now permanently legislated at that level. Companies that qualify as base rate entities save 5 percentage points compared to the standard 30% rate.

Eligibility Tests for Base Rate Entity Status

Your company must satisfy two tests to be a base rate entity: the aggregated turnover test and the passive income test. Both tests must be met for the relevant income year.

Aggregated turnover test: Your company's aggregated turnover must be less than $50 million. Aggregated turnover includes the turnover of the company plus the turnover of any connected entities and affiliates. This is the same definition used for many other SME concessions.

Passive income test (80% rule): No more than 80% of your company's assessable income can be base rate entity passive income (BREPI). BREPI includes dividends, interest, royalties, rent (from non‑active business property), net capital gains, and certain trust distributions.

What Counts as Passive Income?

The ATO defines base rate entity passive income quite broadly. Understanding what counts as passive income is critical because failing the 80% test means you pay the full 30% rate.

The passive income test is calculated on the company's total assessable income. If your company earns $500,000 from trading and $100,000 in interest (16.7% passive), you pass. But if you earn $300,000 from trading and $1.2 million from dividends (80% passive), you fail and pay 30%.

How to Claim the BRE Rate in Your Tax Return

When lodging your company tax return, you indicate whether your company is a base rate entity. The ATO's online portal and most tax agent software prompt you to answer the two eligibility questions.

If you qualify, the ATO automatically applies the 25% rate to your taxable income. If you are unsure, your tax agent can help calculate your aggregated turnover and passive income percentage before lodgment.

Note that the 25% rate applies to the company's full taxable income — there is no threshold or tier. This is different from the personal income tax system, which uses marginal brackets. If you want to compare company tax with personal tax, use an income tax calculator.

Common Mistakes and Pitfalls

Many companies accidentally fail the passive income test because they do not realise how broadly "passive income" is defined. For example, interest earned on a large cash reserve can quickly push you over the 80% threshold.

Another common mistake is forgetting to include the turnover of connected entities. If you control multiple companies, their turnovers must be added to yours to determine whether you are under the $50 million aggregated turnover threshold.

If your company is close to the boundary, consider restructuring or deferring passive income to future years. For instance, delaying the sale of an investment property or reinvesting dividends can help keep passive income below 80% of total income. Use a take‑home pay calculator to model how company tax affects your after‑tax position.

Frequently Asked Questions

What is the base rate entity tax rate for FY 2025‑26?

The base rate entity tax rate is 25% for FY 2025‑26. Companies that do not qualify pay the standard 30% corporate tax rate. The 25% rate has been in place since 2021‑22 and is now permanent.

Can a trust or sole trader be a base rate entity?

No. The base rate entity rules only apply to companies. Sole traders, partnerships, and trusts are taxed at individual or trust tax rates. However, a corporate trustee of a trust may qualify for the BRE rate if it meets the aggregated turnover and passive income tests.

Does the BRE rate apply to all of my company's income?

Yes, the 25% rate applies to the full taxable income of a qualifying base rate entity. There is no tiered system — qualifying companies pay 25% on every dollar of taxable income, regardless of how much they earn.

What happens if my company barely exceeds $50 million turnover?

If your aggregated turnover is $50 million or more, you do not qualify as a base rate entity and must pay 30% on all taxable income. The test is a hard cutoff. Consider grouping and aggregation rules carefully, as they may include affiliates you do not directly control.

Can a start‑up company claim the BRE rate in its first year?

Yes, if the start‑up meets both tests. For the first year of operation, the aggregated turnover test looks only at the current year's turnover (since there is no previous year). Many start‑ups have low passive income and easily qualify. However, if the company earns significant interest from venture capital funds, the passive income test may be tight.