In Australia, the distinction between a “passive” company (taxed at 30%) and an “active” company (a Base Rate Entity taxed at 25%) is governed by the Income Tax Rates Act 1986.

To advise your client on transitioning a “bucket” company to the lower rate, you should focus on two specific tests that must be met annually.

1. The Two Key Eligibility Tests

For the 2025–26 income year, a company is a Base Rate Entity (BRE) eligible for the 25% rate if it satisfies both of the following:

A. The Aggregated Turnover Test

• Threshold: The company’s aggregated annual turnover must be less than $50 million.

• Aggregation: This includes the annual turnover of the company itself plus any “connected entities” or “affiliates” (e.g., the main trading trust or other group companies).

B. The Passive Income Test (The “80% Rule”)

• The Rule: No more than 80% of the company’s total assessable income can be Base Rate Entity Passive Income (BREPI).

• What is BREPI? This includes:

  • Dividends (except non-portfolio dividends where the company has $\ge$ 10% voting power).

  • Interest, royalties, and rent.

  • Net capital gains.

  • Trust distributions, but only to the extent they are attributable to BREPI of the trust.

2. Requirements to “Make it Active”

Since a bucket company typically only receives trust distributions, its status depends entirely on the nature of the income being “poured” into it.

Strategy A: Change the Distribution Character

If the bucket company’s only income is a distribution from a trading trust, you must ensure that at least 20.1% of that distribution is derived from the trust’s active business activities (e.g., trading sales, service fees).

• Tracing: Under LCR 2019/5, the ATO “looks through” the trust. If the trust earns $100k in trading profit and $0 in passive income, and distributes $100k to the company, the company’s BREPI is 0%. It qualifies for the 25% rate.

• The Trap: If the trust distributes $100k to the company, but that $100k is made up of $85k rent/interest and only $15k trading profit, the company’s BREPI is 85%. It will be taxed at 30%.

Strategy B: Introduce Active Revenue Directly

The company could begin its own active trading arm. To hit the “active” threshold, the company must generate enough trading revenue so that its passive income (rent, interest, dividends) stays below the 80% mark.

• Example: If a company receives $80,000 in rent, it must generate at least $20,001 in active business income (consulting, sales, etc.) to bring the passive ratio down to ~79.9%.

3. Important Considerations

The “Carrying on a Business” Myth

Prior to 2017, companies had to “carry on a business” to get the lower rate. This is no longer the requirement. Eligibility is now purely a mechanical calculation of the 80% passive income threshold and the $50m turnover limit. Even a company with very little activity can qualify if its income mix is right.

Franking Credit Alignment

The rate at which a company can frank its dividends is based on its status in the previous year.

• If the company is taxed at 25% this year, but was taxed at 30% last year, it must generally frank its dividends at 30% this year. This can lead to “trapped” franking credits if not managed.

Anti-Avoidance (Part IVA)

The ATO monitors “artificial or contrived” arrangements designed solely to shift the tax rate. Ensure any change in the company’s activity or distribution profile has a legitimate commercial or structural basis.