The 2015 budget night has long since passed, along with the inflated noise of tax cuts. We are now at a stage of interpreting the legislation behind many of the announcements. As always, the devil is in the detail.
The Federal Treasurer, made the following announcements for small businesses, effective from 1 July 2015:
a. Companies which qualify as small business entities will receive a tax cut of 1.5%, meaning a corporate tax rate of 28.5%;
b. For other non-incorporated small business (which amount to approximately 70% of non-incorporated small businesses), a tax discount of 5% of the income tax payable on the business income, capped at $1,000;
c. Accelerated depreciation write-offs on assets up to $20,000;
d. An increased range of deductions available for start-up costs;
e. A new form of CGT roll-over for certain restructure events (2016FY onwards); and
f. No FBT on work-related electronic devices.
Certainly nothing earth shattering, however welcome announcements nonetheless, especially in the case of the 1.5% company rate decrease and the $20k write off.
It should be noted that the tax legislation already provides for many tax concessions for the small business, therefore it’s essential knowing if you are a small business and if you are, what tax concessions are you can access.
So just who is a small business?
Criteria 1: You must be carrying on a business, not just income earning activities.
Criteria 2: Your ‘aggregated turnover’ must be less than $2m. This is designed to capture groups of businesses. Care is needed to analyse these rules, as unsuspecting entities can be grouped via various legal relationships
• Should I change my business structure to access the 1.5% tax rate reduction? As always with tax matters, it depends on a range of factors.
• If my business trades through a trust, will my corporate beneficiary be entitled to the reduced tax rate or tax discount? In short no, companies who are merely beneficiaries of small business entities will not be eligible for the reduced tax rate or tax discount.
• Australia is lucky enough to enjoy the dividend imputation system, an overarching principle of which shareholders get a credit for tax paid by companies on earnings which have already been subject to tax at the company level.
The legislation provides that companies taxed at a rate of 28.5% will still be able to pay franked dividends with franking credits calculated at the old rate of 30%. This means that affected companies may deplete their franking accounts faster than expected. i.e. a company cannot attach franking credits in excess of what physical tax it has historically paid.
As with many tax concessions applied by company’s (R&D concessions etc), when earnings are eventually paid out to shareholders as dividends, this tax rate reduction will likely be lost. That is, shareholders will be subject to their marginal tax rates, and only receive a franking credit up to the tax paid the company. i.e. essentially the tax cut is only of benefit whilst the after tax earnings remain inside the company.
Status of legislation
Most of the concessions have now either received or are awaiting Royal Ascent. We are yet to see the draft legislation for the announced CGT roll-over measures.
We will keep our clients informed once draft legislation is released for the announced CGT concession.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.