The tax cuts for small to medium-sized enterprises (SMEs) passed the upper house on Thursday (18 October).
Established while Malcolm Turnbull was still prime minister, the government’s original tax cut plan meant to drop the corporate tax rate for SMEs with annual turnovers of up to $50 million from 30 per cent to 25 per cent over a 10-year period, with the first drop to 27.5 per cent coming into effect on 1 July 2018, and to 25 per cent by 2026–27.
However, after the industry had lobbied for the government to bring forward the already legislated enterprise tax cut, the Morrison government announced that it would introduce legislation to bring the tax rate down to 25 per cent from 2021–22 for businesses with an annual turnover below $50 million — five years earlier than the former plan.
It is expected that 3.3 million SMEs, as well as their 7 million employees, would be the beneficiaries of the tax cuts.
After the updated legislation passed the Senate, Treasurer Josh Frydenberg and Small Business Minister Michaelia Cash said in a joint statement: “Businesses will keep more of their own money — that’s money they can invest back into their business, to create jobs, to boost their productivity and grow.
“Fast-tracking tax relief is part of our plan for a stronger economy and will drive more investment, more jobs and higher wages and builds on the first stage of business tax relief that our government delivered in May 2017.”
The SME tax cut will cost the government about $3.2 billion, which has been partially offset by the $1.3 billion in savings made from scrapping tax cuts for large businesses.
The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, welcomed the new tax cut plan, saying that it would increase jobs and boost economic growth, particularly in rural and regional areas “where the sustainability of so many communities is underpinned by small businesses”.
“This was shown in … research that examined the impacts of the 2015 tax cuts for SMEs with a turnover of less than $2 million,” Ms Carnell said.
“When I talk to SME owners about the possibility of tax cuts, they have said they will put the money back into their business — equipment, more staff and expansion.”
In addition to dropping the tax rate for incorporated SMEs, the government said that unincorporated businesses would also receive a 16 per cent tax discount by 2021–22 under new laws.
“For example, a small business such as a café that makes $100,000 profit will have an additional $1,500 in 2020–21 and $2,500 in 2021–22,” the joint statement by Mr Frydenberg and Ms Cash stated.
Labor treasurer Chris Bowen said that the opposition was happy to implement the change in tax policy if elected into Parliament in the next federal election.
“[Businesses] deserve the certainty to know these tax cuts are locked in,” Mr Bowen said.
Once the cuts tax effect, Australia will be left with two different company tax rates, after the government was forced to abandon plans to slash the tax rate for all businesses after it was rejected by the Senate.
While tax cuts will be a welcome relief for SMEs, an accountant warned that it may not be without some pain, suggesting that shareholders could be in for a nasty surprise when it comes to dividends.
Treasury costs leaked to the media in September also indicate that the government has been considering extending the $20,000 instant asset write-off threshold to businesses with annual turnovers of $2 million to $10 million or expanding the $20,000 limit.
However, the government had changed the definition of a small business to one with annual revenues of up to $10 million, meaning that tax concessions would be available to businesses that fall in this category.