Treasurer Scott Morrison’s 2016-17 Federal Budget once more demonstrated the Australian Government’s focus on stimulating growth in the small business sector through tax relief, as evidenced by last year’s 1.5% company tax rate cut for entities earning under $2 million. This year however, the Turnbull Government went one step further, recognising the significance of medium-sized businesses in the Australian economy, with announcements geared towards those earning up to $10 million annually.
One of this year’s flagship proposals – the Ten-Year Enterprise Tax Plan – proposed a raft of new measures designed to provide immediate tax relief for SMEs, before filtering through to larger entities over the next decade.
Increase of the unincorporated small business tax discount
From 1 July 2015, individuals and individual partners in a partnership with business income of less than $2 million have enjoyed a tax discount of 5% of tax paid on business income, capped at $1,000 per individual.
From 1 July 2016, the new measures seek to increase the annual aggregated turnover threshold to $5 million, allowing more sole traders and individuals in business partnerships to access the tax discount.
The tax discount will also increase over the coming ten year period, with the first increase to 8% commencing on 1 July 2016 and applicable through the year ending 30 June 2024. The discount rate will then increase to 10% in 2024-25, 13% in 2025-26 and 16% in 2026-27.
The annual tax discount cap of $1,000 per individual will remain in place as the discount rate increases over the next ten years.
While the increase in the turnover threshold results in a larger pool of eligible individuals, retaining the annual tax discount cap provides limited benefit for those who were already eligible to access the concession. These measures are in line with the budget’s growth-friendly theme, however, while the annual discount cap remains, the real dollar benefit to those eligible under the extended threshold and increased discount rate remains stagnant.
Reduction of the company tax rate
Companies that fit the small business entity definition (those with an aggregated annual turnover of less than $2 million) are subject to a company tax rate of 28.5% for the 2016 financial year, while others will continue to be subject to a tax rate of 30% for the current financial year.
From 1 July 2016 however, the Ten-Year Enterprise Tax Plan measures seek to reduce the applicable company tax rate for companies in conjunction with the increase in the small business entity threshold increases over the coming ten years. Accordingly, the company tax rate applicable to each company will be based on its aggregated annual turnover and ability to meet the small business entity criteria.
The company tax rate will drop to 27.5% for businesses with a turnover threshold of less than $10 million in 2016-17, extending to a threshold of $25 million for 2017-18, $50 million in 2018-19, $100 million in 2019-20, $250 million in 2020-21, $500 million in 2021-22, $1 billion in 2022-23 and then all companies in 2023-24. For all companies, the rate will then fall to 27% in 2024-25, 26% in 2025-26 and 25% in 2026-27. For the financial years prior to 2023, entities that do not meet the applicable turnover thresholds will remain subject to a tax rate of 30%.
Small business entity turnover threshold to be increased to $10 million
As part of the Government’s Ten-Year Enterprise Tax Plan, the small business entity turnover threshold will be increased from $2 million to $10 million from 1 July 2016.
Under the current law, businesses with an aggregated annual turnover of less than $2 million are entitled to access a number of small business tax concessions, including simplified depreciation rules, trading stock rules, and Pay-As-You-Go instalment calculation methods.
From 1 July 2016, we expect that small business tax concessions, such as the following, will be available to businesses with an aggregated annual turnover of less than $10 million:
· Simplified depreciation rules, including the immediate write-off of depreciating assets costing less than the threshold amount ($20,000 until 30 June 2017), and pooling of most other depreciating assets in the general small business pool (30% diminishing value rate and 15% for additions)
· Simplified trading stock rules which allow taxpayers to estimate the value of their trading stock on hand at year end, rather than conducting a stocktake where a reasonable estimation indicates that the stock movement is less than $5,000
· Immediate deduction for prepaid expenses, where the prepayment covers a period of 12 months or less, that ends in the next income year
· Simplified Pay-As-You-Go instalment calculation method using the GDP-adjusted option
· Accounting for GST on a cash basis and paying GST instalments as calculated by the Australian Taxation Office
· Exemption from fringe benefits tax where work-related devices such as mobile phones, laptops and tablets are provided to employees.
However, the Government has indicated the current $2 million turnover threshold will be retained for the purposes of accessing the small business capital gains tax concessions, and access to the unincorporated small business tax discount will be limited to entities with a turnover of less than $5 million. However, it is unclear whether the new threshold will be applied when determining if businesses can access the new Small Business Restructure rollover relief, which was introduced earlier this year, allowing small businesses to change their legal structure without triggering any income tax liability when business assets are transferred.
The increase in the small business entity turnover threshold is a welcome change for many businesses as it will allow greater access to concessions which had limited application to businesses with turnover of less than $2 million. However, the change in threshold also introduces more complexity and questions as to which concessions will apply the new threshold. For example, the Government has indicated that $2 million threshold will be retained for the purposes of the small business capital gains tax concessions, and the new $5 million threshold for the small business tax discount will add further complexity. Multiple thresholds increase complexity and confusion no matter how well intentioned they are.
Small business GST reforms
The Government also announced three minor changes to simplify the GST for small businesses. The Government has proposed:
· Extending the option to account on a cash basis to businesses with an annual turnover of less than $10 million from 1 July 2016
· Allowing businesses with an annual turnover of less than $10 million to pay ‘GST instalments’ as determined by the Australian Taxation Office from 1 July 2016
· Allowing businesses with an annual turnover of less than $10 million to use simplified BAS reporting from 1 July 2017 (following a trial in the 2016-17 financial year).
By Mark Molesworth, BDO Tax Partner
Mark is a Brisbane-based Tax Partner for BDO in Australia. He is a direct taxation specialist with almost 20 years’ experience in working with taxpayers of all sizes and across a broad range of industries. Mark has been a key author of BDO’s analysis of the Federal Budget for the past 15 years and is a regular media commentator on a range of tax issues.