24/05/2016

Small and Medium Enterprises have once again been a big winner in this year’s Federal Budget, unveiled on 3 May 2016 as a prelude to the upcoming General Election. Last year’s Federal Budget, of course, was also kind to SME’s, with the introduction of the $20,000 instant asset write-off and a cut to the headline rate of taxes the centerpiece, and this year’s Budget revisits and expands many of those initiatives, which can only be good news to the two million or so SME’s which help to drive the Australian economy.

A further tax cut

The tax rate for small companies is to be reduced to 27.5% for businesses with a turnover of less than $10 million as of 1 July this year. The government states that this will deliver a lower tax rate for around 870,000 companies who employ over 3.4 million workers. The current tax rate for small companies is 28.5%, but this lower rate is currently only available for companies with a turnover of less than $2 million. Companies with a turnover above that level must currently pay the full headline companies rate of 30%.

Over ten years the tax rate for all companies is set to decrease. Over that period, the Government plans to keep raising the maximum turnover threshold for the 27.5 per cent corporate tax rate until all companies are included by 2023-24, followed by a series of further cuts to the rate for all companies until the rate reaches 25% in 2026-27.

Last year, the government introduced a tax cut in the form of a discount for unincorporated small businesses (such as those run as sole traderships, partnerships or through trusts) to ensure there were was a level playing field with small companies. From 2016-2017, the scope of this discount is being extended. From 1 July 2016, the discount will be available to businesses with an annual turnover of less than $5 million, up from the current threshold of $2 million, and will be increased to 8 per cent. Over the next decade, the intention is to further expand the discount in phases, to a final discount of 16 per cent.

There is a sting in the tail however. The maximum discount available will remain in cash terms fixed at $1,000, which at first glance appears to make a nonsense of the claim that the discount is being extended.

Extension of small business concessions

In a very welcome move, the Government has announced that the turnover threshold for most (but not all) of the small business concessions is to be increased bring in all businesses with a net aggregate turnover of less than $10m. This figure is currently $2m. Up to 90,000 businesses are expected to be eligible for the first time for these concessions, which will be available from 1 July 2016 and include:

  • simplified depreciation rules, including immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2017
  • simplified trading stock rules, giving businesses the option to avoid end of year stocktake if the value of their stock has changed by less than $5,000;
  • a simplified method of paying PAYG instalments calculated by the ATO, which removes the risk of under or over estimating PAYG instalments and the resulting penalties that may be applied;
  • the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;
  • other tax concessions currently available to small businesses, such as fringe benefits tax (FBT) exemptions (from 1 April 2017 to align with the FBT year); and
  • a trial of simpler business activity statements (BAS), reducing GST compliance costs, with a full roll-out from 1 July 2017.

The widening of the simplified depreciation rules is particularly welcome. This covers the $20,000 instant asset write-off which was a striking success amongst many small businesses last year. As we head towards the end of the tax year, many small businesses will be looking to maximize their capital investment in a tax efficient manner by, for example, upgrading computers and office equipment. They will typically be able to claim an immediate tax deduction for all that expenditure and the widening of the pool of businesses which qualify is very welcome.

But it’s not all good news…

Unfortunately, the decision to exclude the Capital Gains Tax concessions for small businesses (the most widely used and valuable of the small business concessions) from the increased turnover threshold is a real shame, not least because the introduction of different turnover thresholds for different reliefs will increase complexity for small businesses. So, whilst the concessions listed above are now available for businesses with an annual turnover of less than $10 million, the CGT concessions are still only available to businesses with an annual turnover of less than $2 million (or that satisfy the maximum net asset value test). On the face of it, there appears to be no logic to that decision, other than (presumably) the potential cost in forgone tax revenue to the government.

Still plenty to do to simplify the tax system

So, to wrap up, it’s been a very positive Budget for SME’s. As the traditional “engine room” of the Australian economy, the moves announced are generally very welcome and should help to boost investment and employment in the sector. There is still plenty to do to simplify the tax system for small business and to help build productivity and competitiveness, but this Budget is certainly a step in the right direction.