Matching rhetoric with action
We have all heard the catchcry that small business is the powerhouse behind the Australian economy and that it is integral to Australia’s future wellbeing.
Despite its importance, small business has been left to deal with an ever-increasing compliance burden while it is coming to grips with the impacts of digital technology.
It is pleasing to see that, at last, the small business sector is receiving some much-deserved attention from the Financial System Inquiry, Competition Policy Review, Board of Taxation’s Review of Tax Impediments Facing Small Business and now the federal Budget. This refocusing of attention is partly due to the influence of having the Minister for Small Business as part of cabinet. Bruce Billson truly understands the importance of having a vibrant small business sector and its impact on the wellbeing of the economy.
The 2015/16 federal Budget’s centrepiece is a focus on the small business sector. The government is hoping that a revival of small business will resurrect flagging growth, as the economy is impacted by the decline of the mining boom and a sharp fall in our terms of trade.
The federal Budget included many changes benefiting small business taxpayers. These included tax cuts, an immediate deduction for professional fees and the ‘big ticket’ item: an immediate deduction for assets costing less than $20,000, available from Budget night.
The integrity in our tax system was another focus, with the introduction of measures to combat multinational tax avoidance. This included a new anti-avoidance provision and more extensive transfer pricing documentation requirements. The Budget also proposed applying the GST to cross-border supplies of digital products and services. This article will examine the small business tax measures that occupy a large part of the 2015/16 Budget agenda and a few of the tax changes impacting individuals.
Small business tax package
Instant asset write-off
Small businesses will be entitled to an immediate deduction (as opposed to claiming depreciation) for assets costing less than $20,000 that are bought and installed ready for use between 12 May 2015 and 30 June 2017. This represents a significant increase from the existing write-off threshold of $1,000 that currently applies to assets acquired from 1 January 2014. Assets valued at $20,000 or more may be placed in the small business depreciation pool and depreciated at 15 per cent in the first year and 30 per cent in subsequent years.
Accelerated depreciation will apply to the majority of capital asset types, including cars, machinery and equipment. A small number of assets will not be eligible for the immediate write-off, including horticultural plants and in-house software. Specific depreciation rules apply to these assets.
While a bigger up-front tax deduction is a good thing, the new threshold will only make a cash flow difference when a business is in a tax-payable position – it is of limited value to businesses in the start-up phase. Further, we are expecting disputes will arise as to what constitutes an asset for the purposes of measuring the less-than-$20,000 limit. For instance, is an item to be properly viewed as an asset in its own right, or is it part of a larger asset? Expect to see more guidance on this from the ATO.
Accelerated depreciation for primary producers
For income years commencing on or after 1 July 2016, the government will allow all primary producers to immediately deduct capital expenditure on fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills. In addition, the government will allow primary producers to depreciate over three years all capital expenditure on fodder storage assets, such as silos and tanks used to store grain and other animal feed.
Immediate deduction for professional expenses
Small businesses that seek professional advice in establishing the business will be entitled to claim an immediate deduction for professional expenses, such as legal and accounting advice. Currently, some professional costs associated with a business start-up are deducted over a fi ve-year period as ‘black hole expenditure’ – for example, legal expenses incurred in establishing a new company, trust or partnership.
Incorporated small businesses
Another welcome announcement is that small businesses structured as companies will see a 1.5 per cent reduction in the company tax rate, from 30 per cent to 28.5 per cent. These companies will still be able to frank their dividends to a maximum of 30 per cent if they have suffi cient franking credits. If companies exceed the $2 million small business threshold, they will be taxed at 30 per cent on their full taxable income. This hard cut-off may act as a disincentive to accelerate business growth.
Non-incorporated small businesses
In recognising that most small businesses are not conducted by companies, the government has extended its tax-cut concession to individuals who derive small business income from unincorporated entities, such as sole traders (37 per cent of small businesses), trusts (25 per cent) and partnerships (12 per cent). A 5 per cent discount will be provided to individuals who receive business income from these unincorporated entities. The discount will be paid in the form of a tax offset, capped at $1,000 per individual per income year. Presumably, this means that an individual benefi ciary who receives distributions from a discretionary trust that runs a small business will be entitled to a 5 per cent reduction of the tax payable on their share of the trust’s business income.
Capital gains tax rollover relief
Where small businesses restructure, their owners may be liable for CGT, because there are currently few effective and appropriate CGT rollovers available for small business restructures. To allow for greater fl exibility in small business structures, the government has announced restructures of small business entities will attract CGT rollover relief; however, most state and territory governments apply stamp duty to these same restructures, so this will need to be considered.
Individuals: work-related car expenditure options reduced
From 1 July 2015, taxpayers will only have two methods available to calculate and claim their work-related car expenses – the cents-perkilometre and log-book methods. The sliding scale of deductions available under the cents-per-kilometre method, based on vehicle engine size, will be removed and replaced by a fl at rate for all vehicles. The current law requires taxpayers to know their engine size and type to determine what set rate is used in calculating their claim, to a maximum of 5,000 business kilometres. A fl at rate of 66 cents per kilometre for all claims regardless of the engine size or type will replace this sliding scale.
Individuals: entertainment benefits will no longer be fully exempt or rebatable
The current fringe benefits tax (FBT) law provides that meal entertainment and entertainment facility leasing expenses are fully exempt or fully rebatable for certain employers. This means these expenses are not subject to the grossed-up caps and accordingly, no FBT is payable. The caps for the 2016/17 FBT year are $31,177 for public benevolent institutions and health promotion charities, and $17,667 for public and non-profi t hospitals and public ambulance services.
In addition, these expenses are not currently reportable on employee PAYG payment summaries.
The proposed changes mean employers will be liable for FBT in full, where the grossed-up value of entertainment benefi ts exceeds $5,000 (which equates to $2,329 in benefi ts that are subject to GST). However, where the employee has not fully utilised the general $31,177 or $17,667 cap with other benefi ts, entertainment benefi ts can exceed the $5,000 cap to the extent of the unutilised general cap. It is pleasing to see that the government has reduced the exploitation of this concession; this was well overdue.
There is an acknowledgement in the Budget papers that compliance costs are regressive for small business and that a concessionary tax treatment is appropriate. It is pleasing to note that the IPA’s signature policy of having a concessionally lower tax rate for all small businesses, regardless of structure, has been adopted.
Our advocacy efforts have infl uenced government policy, and we are hopeful some of our other small business policy recommendations may also come to fruition in the not-too-distant future.