Budget 2016: Business
There's no question that there is a lot to like in the Budget if you're a small business owner.
The Budget introduces a series of tax cuts progressively applied to business. Significantly, the threshold for accessing some of the small business entity concessions will increase dramatically from the current $2 million threshold to $10 million.
Reducing the company tax rate to 25%
Date of effect: Progressively from 2016-17
The company tax rate will be reduced to 25% over 10 years. The reduction will initially target companies with a turnover less than $10 million (up from $2 million) and the company tax rate will drop to 27.5% (from 28.5% for $2 million turnover businesses or 30% for those between $2 million and $10 million). The company tax rate cut will apply to all businesses with turnover of $1 billion by 2023/24 and to all businesses by 2026/27.
The company tax rate will be further reduced progressively from the 2024/25 income year as follows:
Franking credits will still be calculated with reference to the amount of tax paid by the company paying the dividends.
Tax discount for unincorporated small business entities
Date of effect: Progressively from 1 July 2016
The tax discount for unincorporated small businesses will increase incrementally over 10 years from 5% to 16%.
The tax discount for individuals who receive income from unincorporated small businesses (trusts, partnerships, sole traders) will increase to 8% on 1 July 2016, remain constant at 8% for eight years, then increase to 10% in 2024-25, 13% in 2025-26 and reach a new permanent discount of 16% in 2026-27. The measure coincides with staggered cuts in the corporate tax rate to 25%.
The current cap of $1,000 per individual for each income year will be retained.
The tax discount applies to the income tax payable on the business income received by individuals from an unincorporated small business entity.
Access to the discount will be extended to individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $5 million.
Small business entity threshold jumps to $10m
Date of effect: 1 July 2016
In a significant win for business, the small business entity turnover threshold will increase from $2 million to $10 million from 1 July 2016, which will give a greater number of businesses access to a range of tax concessions such:
- The lower small business corporate tax rate (27.5%);
- Simplified depreciation rules including an immediate write-off for assets costing less than $20,000 that are acquired by 30 June 2017 and depreciation pooling provisions;
- Simplified trading stock rules;
- A different method of calculating PAYG instalments;
- The option of accounting for GST on a cash basis, providing a massive boost to cash-flow for those growing businesses who most need it;
- FBT exemptions (this would start from 1 April 2017); and
- A trial system of using a simpler business activity statement.
The current $2 million turnover threshold will be retained for access to the small business CGT concessions and access to the unincorporated small business tax discount will be limited to entities with turnover less than $5 million.
GST will apply to all imported consumer goods
Date of effect: 1 July 2017
The current GST systems provides an exemption for goods that are imported into Australia with a value of less than $1,000.
The exemption will be removed from 1 July 2017 so that GST can apply to all goods imported by consumers, which means that consumers will pay GST on any goods irrespective of whether they are purchased from Australia or from overseas.
Overseas suppliers with Australian turnover of $75,000 or more will be required to register for, collect and remit GST for sales within Australia (irrespective of their value) via a vendor registration model.
The intent is to level the playing field so that foreign suppliers will need to factor in GST obligations when selling goods to Australian customers. The challenge for the ATO is enforcing the rules.
The Federal Government has indicated that the measure will be reviewed after two years to ensure they operate as intended.
Simplifying Division 7A
Date of effect: 1 July 2018
The compliance burden of Division 7A has long been an issue for small and medium business taxpayers that use companies for business or investment activities as they often struggle to understand and comply with the rules.
The Budget includes reforms that are designed to ease the compliance burden and to give effect to some of the recommendations made by the Board of Taxation in its Post-implementation Review into Division 7A.
The reforms include a self-correction mechanism for inadvertent breaches of Division 7A, appropriate safe-harbour rules to provide certainty, simplified Division 7A loan arrangements and a number of technical adjustments to improve the operation of Division 7A and provide increased certainty for taxpayers.
For more information about the 2016 Federal Budget and how it impacts you or your business, contact us on 02 9957 4033.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.