Last week the Treasurer, Joe Hockey delivered his second federal budget -- with some key surprises in it, especially for small businesses. I believe there were 5 major initiatives announced with a couple of surprises that were hidden in detail.
1. Micro businesses
Those businesses that have a turnover of less than $2 million make up over 97.5% of all businesses in Australia. With an effective date from the 2015/2016 income year, the government has announced a tax reduction for small businesses with an aggregated annual turnover below $2 million regardless of entity type. For companies, the company tax rate will be reduced by 1.5% to 28.5%. Maximum franking credits rates for a distribution will remain unchanged at 30%. For those businesses who do not operate through a company, the government will introduce a 5% discount on tax payable on business profits. The discount will be capped at $1,000 per individual for each income year and will be delivered as a tax offset. With the marginal tax rate for companies being reduced to 28.5% and the maximum individual marginal rate staying at 45% there may be some tax saving opportunities open for some.
2. Accelerated depreciation on purchases up to $20,000
Businesses with a turnover of less than $2 million are able to claim an immediate deduction for most assets costing less than $20,000 from the 12th May 2015. This means capital expenditure made before the end of the financial year will be eligible for this upfront deduction should it fall into the specified criteria. Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed in the small business simplified depreciation pool and depreciate at 15% in the first year and 30% each year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period. It should be noted that not only will you receive the immediate tax deduction for expenditure this financial year, the new tax break lasts until 30 June 2017.
3. Capital Gains Tax relief for changes to small business structures and business establishment costs deductions
The government has proposed streamlining the business registration process and announced that business establishment costs will be able to be claimed immediately from 1st July 2015. The professional costs such as legal and accounting advice were previously eligible for a deduction over a 5 year term, however from the 2015/2016 income year an immediate deduction will now be available.
In addition, small businesses with a turnover of less than $2 million will be eligible for Capital Gains Tax (CGT) rollover relief to change the legal structure their business operates from without triggering Capital Gains Tax.
Capital Gains Tax rollover relief is currently available on transfer of business assets from individuals, partnerships and trusts into a company structure but all other entity type changes have the potential to trigger a Capital Gains Tax liability. It is expected that this would allow a much broader range of restructuring options without triggering Capital Gains Tax and may have the effect of providing an incentive for businesses looking to take advantage of the new reduced company tax rate or change their structure for asset protection.
4. Simplification of motor vehicle claims
The government has decided to remove the 12% of original value and 1/3 actual expense methods to calculate motor vehicle claims. The “cents per kilometre method” will be modernised by replacing the three current rates based on engine size with one rate set at 66 cents per kilometre to apply to all motor vehicles, with the commissioner responsible for updating the rate in the following years. The “log book method” of calculating expenses will be retained. These changes will not affect leasing and salary sacrifice arrangements.
5. Changes to age pension eligibility
This year's budget outlined changes to the age pension eligibility tests. From 1st January 2017 the government will increase the assets test limit to qualify for a full pension from $286,500 to $375,000 for couples, and from $202,000 to $250,00 for singles. The rate that the age pension decreases has also been increased from $1.50 to $3.00 for every $1,000 you are over the threshold, which has reduced the maximum limit to receive a pension to $823,000 for couples and $547,000 for singles.
Approximately 91,000 current part pensioners will no longer qualify for the pension and a further 235,000 will have their part pension reduced. Pensioners who lose pension entitlements on 1st January 2017 will automatically be issued with a Commonwealth Seniors Health Card or a Health Care Card for those under pension age. For Pensioners with modest assets, the changes will increase their pensions.