Small businesses operating as companies are one of the bigger winners out of this year’s budget.
Increase the small business entity turnover threshold to $10 million
From 1 July 2016, the turnover threshold for small business will increase from $2 million to $10 million.
This will extend the number of incorporated businesses that are able to gain access to small business concessions such as a lower company tax rate of 27.5% from 1 July 2016. A larger number of companies will also be able to access the larger immediate deduction for assets costing less than $20k as well as deprecation pooling provisions that were part of the 15/16 Budget.
Our Thoughts: This move will help businesses that have grown or that now have related businesses that turnovers are aggregated for small business purposes. The further reduction in tax rate will allow small businesses to utilise capital to further expand their businesses.
We note that the current $2 million turnover threshold for the small business capital gains tax concessions will remain unchanged.
Reducing the company tax rate to 25%
The government plans to gradually reduce the company tax rate to 25% over the coming 10 years. This will be done by expanding the 27.5% small business tax rate out periodically to larger turnover companies then reducing this rate to 27% in 2024/25; 26% in 2025/26 and 25% in 2026.27.
Franking credits will be based on the rate of tax paid by the company making the distribution
Our Thoughts: A lower company tax rate will make Australia a more attractive business location for multinationals. We think that extending the lower tax rate to high turnover companies reduces the advantage that is hoped to be gained by the small business measures. Shareholders should also be aware that franking credits received on dividends will also reduce accordingly meaning that there will be a greater requirement for “top up tax” payments by individuals.
Increasing the unincorporated small business tax discount
Currently, individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million, are eligible for a small business tax discount of 5% of the income tax payable. The discount is capped at $1,000 per individual per income year.
From 1 July 2016, the tax discount for unincorporated small businesses will be increased incrementally over 10 years to 16%.
The discount will increase to 8% for the 2016/17 year, moving to 10% in 2024/25; 13% 2025/26 and 16% 2026/27
Access will also be extended to individual taxpayers with business income from unincorporated business that has an aggregated annual turnover of less than $5 million.
Our Thoughts: This is an attempt to even the scales between those operating their entities in companies and other structures. Although the increase in the discount is good, the fact that the cap is not increasing means that the actual benefit is yet to be seen. It is interesting that the government is extending the small business definition to entities with turnovers up to $10million however only increasing the access of this provision to entities upt o $5 million turnover.
Other Items of Note
Innovation Agenda Bolstered Further
Angel investor tax breaks expanded
In December last year the Government announced incentives for angel investors that would provide a 20% non-refundable tax offset based on the amount of their investment capped at $200,000 per investor, per year. This would allow the investors to reduce their overall tax liability for the relevant year.
The Government also announced that the incentive would provide a 10-year CGT exemption for investments held for at least three years.
These tax concessions will only be available to investors in eligible companies:
- That undertake an eligible business
- Incorporated during the last three income years
- Are not listed on any stock exchange
- Have expenditure less than $1 million and income less than $200,000 in the previous income year.
The Budget extends the concessions by:
- Reducing the holding period from three years to 12 months for investors to access the 10 year capital gains tax exemption;
- Including in the definition of eligible start-ups a time limit on incorporation and criteria for determining if the start-up is an innovation company;
- Requiring that the investor and innovation company are non-affiliates; and
- Limiting the investment amount for non-sophisticated investors to $50,000 or less per income year in order to receive a tax offset.
Our Thoughts: It’s disappointing to see the limiting of investment (and subsequent generous tax breaks) to high net wealth individuals. This move coupled with the changes in superannuation may just see angel investing as the new retirement vehicle for high net wealth individuals. With 200k tax offset per year and exemption from capital gains on the cards this might be where those withdrawals of pension balances in excess of $1.6 million go.
GST to Apply to all Imported Consumer Goods
Currently, the GST system provides an exemption for goods that are imported into Australia with a value of less than $1,000. This exemption will be removed so that GST can apply to all goods imported by consumers from 1 July 2017.
In effect, all goods imported by consumers will face the same tax regime as goods that are purchased in Australia.
Overseas suppliers that have an Australian turnover of $75,000 or more will be required to register for, collect and remit GST for all goods supplied to consumers in Australia (regardless of their value), using a vendor registration model.
While this is unlikely to have a direct impact on Australian businesses importing goods from overseas, this should at least level the playing field so that foreign suppliers will need to factor in GST obligations when selling goods to Australian customers.
It will be interesting to see how the ATO enforces these new rules. The Government has indicated that the measure will be reviewed after two years to ensure that the new rules operate as intended and to take account of any international developments.