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4May 2016

Federal Budget 2016/17 Response

Small businesses with aggregated annual turnover of less than $10 million appear to be the winners under this year’s Federal Budget.

The Treasurer, Scott Morrison’s first Budget seems to be a win for small business.  With welcome initiatives that should help support growth in the economy and nudge finances back towards sustainability over time. Having said that, it does falls short of what is needed. Unfortunately, our economy and looming election have constrained how much the Treasurer could do last night, particularly on spending, which will remain elevated as a share of GDP.

For business, the Budget’s worthy focus on jobs and growth is admirable – growing the economy should boost employment and help repair the budget. In this context, tonight’s tax breaks and expansion of incentives for small businesses are particularly welcome, alongside the renewed focus on innovation and infrastructure.

The company tax rate will be cut for the first time in 15 years. For small business this means a re-defining of the term small business (for the purposes of tax discounts) with the growth from $2 million to $10 million, this gives almost 100,000 businesses access to tax concessions, including a reduction from 28.5% to 27.5%, with effect from 1 July 2016. For big businesses it currently sits at 30%, and over the next ten years will be cut right down to 25%. The plan is to do it slowly, with businesses with less than $25 million in turnover paying 27.5% in 2016-17. In the next year the businesses taking in less than $50 million will get the tax cut. In 2024-25 all companies will go down to 27%, then one percentage point per year until it reaches 25%.

The introduction of an increased small business threshold is a welcome move as not all small businesses were able to take advantage of the existing concessions due to the low threshold.  However, it is disappointing that the Government has not taken the opportunity to apply this $10 million eligibility threshold to all concessions targeted at small businesses.  Small business thresholds will continue to be inconsistent despite this change.   This often leads to confusion and increased compliance costs due to the complexity of the rules applicable to the small business sector.

Say goodbye to tax-free online purchases. The Government has decided to apply GST to low-value (i.e. less than $1000) goods bought overseas from July 2017. The plan essentially relies on foreign businesses complying and registering with the ATO, then collecting the tax through the sales process. The Tax Office will embark on an educational program to sign up the biggest vendors. Australia will enlist the businesses’ home countries to help with compliance, and if a seller consistently refuses to collect the tax, they might even face having their website blocked. Other concessions to which the increased $10 million threshold will apply from 1 July 2016 include:

  • Simplified trading stock rules, giving them the option to avoid end of year stock-take if the value of stock has changed by less than $5,000
  • A simplified method of paying PAYG instalments calculated by the Australian Taxation Office (ATO) which removes the risk of under or overestimating PAYG instalments and the resulting penalties that may be applied
  • The option to account for Goods and Services Tax (GST) on a cash basis and pay GST instalments as calculated by the ATO
  • Other tax concessions currently available to small businesses, such as fringe benefits tax (FBT) exemptions (from 1 April 2017 to align with the FBT year)
  • A trial of simpler business activity statements (BAS) reducing GST compliance costs, with a full roll-out from 1 July 2017.

The current $2 million turnover threshold will be retained to access the small business capital gains tax (CGT) concessions, and access to the unincorporated small business tax discount will be limited to entities with turnover less than $5 million.

SUMMARY

Small Business

  • The small company tax rate will be cut to 27.5 per cent from 1 July, 2016 and the threshold for accessing and the annual turnover threshold for businesses able to access it will increase from $2 million to $10 million. The tax rate will then be progressively reduced to 25 per cent by 2026.
  • The unincorporated tax discount will be increased from 5 per cent to 8 per cent from 1 July, 2016 and then progressively increased to 16 per cent by 1 July, 2026. The discount will be limited to small businesses with turnover of less than $5 million and remain capped at $1,000 per individual firm per year.
  • Concessions already available to small businesses with turnover of less than $2 million will be extended to businesses with turnover of less than $10 million from 1 July, 2016, including:
    • Simplified depreciation rules, including the ability to claim an immediate deduction for each asset costing less than $20,000 until 30 June, 2017.
    • The option to account for GST on a cash basis and pay GST instalments.
    • A simplified method of paying CGT benefits.

Personal Tax & Supperannuation

  • The 32.5 per cent personal tax income threshold will be increased from $80,000 to $87,000 to minimise bracket creep until 2019-2020.
  • The use of superannuation as a tax minimisation or estate planning vehicle will be minimised by:
    • A $1.6 million cap on the amount of superannuation that can be withdrawn tax-free in retirement, to be introduced from July 1, 2017.
    • Decreasing the threshold at which a 30 per cent tax applies to concessional contributions from $300,000 to $250,000.
    • Reducing the annual cap on concessional contributions to $25,000.
    • Introducing a lifetime cap of $500,000 on non-concessional contributions that takes into account all contributions made on or after 1 July 2007. The lifetime cap will replace the existing annual cap on non-concessional contributions and come into effect immediately.
    • Taxing the earnings on transition to retirement pensions.
    • Removing anti-detriment transitional provisions which, in practical terms, provide a refund of contributions tax paid over a lifetime.
  • Superannuation will be made more flexible by various measures:
    • From July 1 2017, people with superannuation balances of less than $500,000 will be able to carry forward unused concessional caps for five years. This will let people with broken career patterns, for example, catch up with their super savings.
    • From 1 July 2017, people aged 65 to 74 will no longer have to satisfy a work test to make super contributions.
  • Superannuation will be made more equitable by introducing a low income tax superannuation tax offset of up to $500 for people earning less than $37,000 to avoid situations in which low income earners pay more tax on superannuation contributions than on their wages. It will replace the low income superannuation contribution when it expires on 30 June 2017.

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