My Business’ Tax expert Mark Chapman gives the lowdown on what was, on the whole, a very positive Federal Budget for small business.
Just over a year ago, I wrote a Federal Budget wish-list for this very publication outlining the tax breaks small businesses were looking for from the 2014 Budget. A reduced rate of tax for small business, an instant asset write-off facility and reform of the employee share scheme rules were amongst the items on that list. But the Treasurer evidently wasn’t paying attention, because absolutely none of the changes I canvassed turned up in the 2014 Budget (although a relaxation of the rules around employee share schemes was announced a few months ago).
A year is a long time in business – and even longer in politics. Fast forward a year and suddenly we have small business at the heart of Budget 2015, undoubtedly the real winners of the night. We could speculate endlessly on what triggered the change of approach, but whatever it was, it was very welcome. So, let’s take a look at the small business assistance package in Budget 2015, analyse what it could mean for your business, and also highlight a few tips and traps for the unwary.
What do we mean by a ‘small business’?
First of all, it’s important to note that you have to be a small business to qualify for all the measures outlined in the Budget package. That means your business must have an aggregated annual turnover of less than $2m.
Small business tax cut
From July 1, 2015, the tax rate payable by small companies will fall from 30 per cent to 28.5 per cent, in a move expected to benefit nearly 800,000 businesses. Better still, the current maximum 30 per cent franking credit will still be available to the shareholders of these companies, allaying fears that the cut to small company tax would simply be paid for by shareholders paying extra tax on their dividends.
Only around 30 per cent of small businesses operate through a company structure. An unexpected tax cut was also delivered to the 70 per cent of small businesses who operate through some form of unincorporated structure, such as a sole trader, partnership or trust. These businesses will receive a five per cent discount on the tax payable on the profits from their business, up to a maximum of $1,000 per individual. The discount will be given in the form of a tax offset through their year-end tax return.
Instant tax deduction for asset purchases of $20,000 or less
From Budget night, small businesses are able to claim an immediate tax deduction for all assets acquired for use in the business up to a value of $20,000. This could include anything from computer equipment to a motor car, a coffee machine for the office kitchen to solar panels for the roof, and has been warmly welcomed by small business, which currently has to write off the cost of such assets over several years.
This tax break lasts until June 30, 2017. The deduction isn’t a one-off; all qualifying purchases through to June 30, 2017 will count. Best of all, with the tax break already effective, businesses can make purchases before June 30, 2015 and see an almost immediate reduction in their tax liability.
Of all the Budget announcements, this is the one that seems to have caught the popular imagination, not surprisingly really because it’s a very generous tax break. Even the small business lobby was caught by surprise with COSBOA admitting that they’d only been lobbying for a $10,000 write-off amount.
Given the largesse on offer, it seems churlish to rain on everyone’s parade. But a little caution does need to be exercised here. In particular, note the following:
- Assets which cost more than $20,000 do not qualify for the tax break at all. These assets must be depreciated in line with the current rules.
- Be cautious when acquiring assets which are close to the threshold. In particular, don’t forget those extra costs which you might have to incur to get an asset into a state where it can be used in the business. If you spend $19,500 on an asset but have to spend another $1,000 on installing the asset to make it useable, you won’t qualify.
- Don’t let the generosity of the tax break override your commercial instincts. This tax break is ideal for those businesses that were planning to purchase assets anyway, or have a real business need to invest. But remember, there’s no such thing as free money. You have to spend a dollar to get 30 cents back (or 28.5 cents after July 1), so make sure any capital purchases fit with your overall business plan. If you’re not sure whether now is the time to make a purchase, or indeed whether to make a purchase at all, have a chat to your accountant, who will be able to quantify the advantages and disadvantages for you.
- You actually have to be in business to get the tax break. There’s been some media coverage to the effect that anyone with an ABN can access this tax break. That isn’t the case. There needs to be genuine business activity undertaken.
- And finally, given the potential for this tax break to be abused in any number of ways, expect the Tax Office to rigorously check claims for this deduction.
Immediate deduction for business start-up costs
Good news for those starting a new business. Previously, costs associated with starting a business, such as legal and accounting advice or costs incurred in setting up a company, trust or partnership, could only be deducted over a five-year period. From July 1, 2015, such costs can be deducted in full immediately.
CGT relief for small business structures
Effective from July 1, 2016, small businesses may change their legal structure without attracting a capital gains tax charge. There’s already a rollover provision for sole traders who choose to incorporate. This measure will extend that relief to other structures such as trusts and partnerships and recognises that many businesses in their early years will look to evolve their structure as they grow. Once this relief commences, they will be able to do that without worrying about the tax consequences.
FBT exemption for the provision of portable electronic devices
The government will introduce an exemption from FBT for employers who provide their employees with more than one qualifying work-related portable electronic device, such as a laptop, tablet or phone.
The current exemption for one such device is already extended to more than one where the devices perform substantially different functions, but there has been confusion in applying this as electronic devices become increasingly multi-functional. This widened exemption should make administration of FBT a bit more straightforward in relation to these items.
Beyond the small business package, there were a number of other announcements that may be of interest to My Business readers. These include:
Changes to car expense deduction calculations
The government is simplifying the way taxpayers can calculate car expenses deductions. Currently, taxpayers can choose between four different methods to calculate the deduction:
- The cents per kilometre method;
- The logbook method;
- 12 per cent of original value; or
- One third of actual expenses.
The latter two methods, which are rarely used, are to be abolished.
Currently, about 80 per cent of people use the cents per kilometre method, which allows them to claim a deduction based on the size of the car’s engine. For small cars, this is 65 cents per kilometre, for medium cars 76 cents per kilometre, and for large cars 77 cents per kilometre.
From July 1, 2015, a standard rate of 66 cents per kilometre will apply to all motor vehicles regardless of engine size, with taxpayers having the option of choosing to claim a deduction for actual expenses incurred using the logbook method if that produces a more advantageous outcome.
New tax rules for foreign temporary workers
From July 1, 2016, the government is changing the tax rules for temporary working holiday makers. Currently, provided they are here for more than six months, such people are treated as residents and are able to claim the tax free threshold and the lower tax rate of 19 per cent on income above the tax free threshold but under $37,000.
Under the new rules, such people will be regarded as non-residents no matter how long they are here. This means they will be taxed at 32.5 per cent from their first dollar of income. Businesses in certain sectors, such as hospitality and agriculture, which rely heavily on the backpacker market for staffing, may find that this impacts both the availability of labour and the rates they have to pay.
A word on what’s not in the Budget
So, we’ve looked at what was present in the Budget, but there was lots of speculation beforehand about possibly far-reaching changes which simply didn’t happen. So, for those who are keeping score at home:
- There are no major changes to superannuation laws or to the GST (unless you’re a Netflix subscriber, in which case your subscription will now come with an added dollop of GST).
- Negative gearing lives to fight another day.
- Dividend imputation wasn’t touched.
- The much discussed tax on bank deposits didn’t happen.
- We aren’t getting a replica of the UK’s “Google Tax” on multinational profits (though the existing anti-avoidance laws are being widened to catch this kind of tax avoidance by the largest corporates).
- Personal tax rates remain untouched, which in effect amounts to a small tax increase because of the effect of “bracket creep” as people with rising incomes move into higher tax brackets.
Looming in the background, work continues on the government’s tax reform White Paper and some or all of these silent issues may reappear in next year’s Budget, once the White Paper process is complete.
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