After the federal budget was unveiled last Tuesday, speculators and commentators were quick to label it the SME-friendly budget, thanks largely to the cuts in business tax for SMEs, as well as more industry-specific tweaks.
However, a recent survey of more than 1,000 business owners suggested just 44 per cent saw the SME tax cuts as a positive development.
Why exactly is that? Surely tax cuts are a good thing, particularly when they are targeted at ‘the engine room of the Australian economy’?
While any cut in tax for SMEs eases cash flow burdens, there are several reasons why these cuts may be seen as less than favourable.
First is the red-tape burden in meeting these changes. With the government outlining a lowering of the rate to 27.5 per cent, and a gradual reduction over the next decade to 25 per cent, there is likely to be confusion as to what the exact rate of tax payable is from one financial year to the next.
The speed of the cuts’ rollout is another source of disenfranchisement. With the Australian (and global) economy lagging at present, immediate stimulus is required to encourage further growth among the country’s more than 2 million SMEs. Holding out for a decade to receive the full tax reduction does little to support the current economic situation.
Yet the value of the cuts themselves have been virtually absent from the discussion. What does a reduction of one per cent in the rate of tax paid by SMEs actually equate to?
On an annual profit of say $100,000, SMEs currently pay $28,500 in tax. Split over four quarters, that equates to $7,125 in tax each quarter.
Once the new tax rate comes into effect, the tax bill on that same $100,000 profit will reduce by $1,000 each year. That’s a saving of $250 per quarter or $83.33 per month.
Consider what $83.33 per month would mean in practice for your business. Sadly, it’s unlikely to be the deciding factor to hire an additional employee, engage in a marketing campaign to drive new business, or roll out a new service offering.
At the same time, inflation – while currently low by historical standards – is still increasing basic costs by around 1.5 per cent annually. As such, the reality is that $83.33 is likely to go towards meeting higher charges on utility bills, insurance and basic supplies, rather than its intended aim of contributing to business growth.
Small business concessions
The threshold for a number of small concessions was increased, bringing the eligibility requirement to maximum turnover of $10 million, up from the current $2 million threshold.
However, here too there are strings attached – most notably the fact that the threshold increase is not uniform across all concessions.
“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,” said Mark Chapman, director of tax communications at H&R Block.
“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.”
By not increasing the threshold on the most commonly used tax concession by SMEs, the financial gains by small businesses will be minimal.
Certain concessions in the budget were clearly targeted at particular growth industries, rather than SMEs in general.
One such example was the decision to extend the alcohol excise refund to spirit distillers.
During a recent trip to Tasmania, My Business spoke with several of the state’s famed whiskey distillers and found strong consensus against the imposition of a hefty alcohol excise, to the tune of $80 per pure litre of alcohol produced. One distiller compared this to the US, saying the rate there is just $3.22 per litre – adding hefty cost burdens to the finished products of Australian distillers.
It also compared unfavourably with the wine equalisation tax (WET) rebate for winemakers and the excise refund scheme already in place for eligible brewers.
“I think that all of the craft [distillers] would be putting that money back into their businesses and the industry, and that only creates growth and more export opportunities and more people employed,” Chris Thomson, the head distiller at Lark Distillery, said earlier this year when speculating what such a measure would mean for Tasmania’s distillers.
The budget changed this to bring distillers in line with brewers, generating a refund of 60 per cent on the excise paid up to a maximum of $30,000 per financial year.
“These changes will provide a boost to the approximately 100 distilleries in Australia who will be eligible for the scheme including many new whisky distillery start-ups in Tasmania,” said the Minister for Small Business, Kelly O’Dwyer.
This is a cost saving any SME owner would undoubtedly welcome with open arms.