By now you would have seen and heard many of the outcomes of the 2016-17 budget. But how does this affect you as a small business owner?
Below we outline some of the relevant key announcements and provide our own Lucent commentary.
- Change in definition of small business from turnover less than $2 million to turnover less than $10 million, effective 1 July 2016.
- Change in Company tax rate for small business with turnover less than $10 million from 28.5% to 27.5%, effective 1 July 2016.
- From 1 July 2016 all businesses with an annual turnover of less than $10 million will have access to:
Simplified depreciation rules, including an immediate deduction for depreciating asset purchases costing less than $20,000 until 30 June 2017. Note: This measure ceases 30 June 2017 with the threshold for immediate tax deductibility returning to $1,000, from 1 July 2017.
Simplified trading stock rules, giving the option to avoid an end of year stocktake if the value of stock has changed by less than $5,000.
Additional tax concessions that are currently available to small businesses, such as fringe benefits tax (FBT) exemptions (from 1 April 2017 to align with the FBT year).
- Unfortunately these threshold changes will not affect eligibility for the small business capital gains tax concessions, which will only remain available for businesses with annual turnover of less than $2 million or that satisfy the maximum net asset value test.
- Since many small businesses are not companies, the Government will extend the unincorporated small business tax discount. From 2016-17, the discount will be available to unincorporated businesses with annual turnover of less than $5 million, up from the current threshold of $2 million, and will be increased to 8 per cent. The maximum discount available will remain at $1,000. Over the next decade, the discount will be further expanded in phases, to a final discount of 16 per cent.
“Overall we believe the announced measures are good for small business. We would however, have liked to see these measures go a step further in reducing personal income tax rates – Many of our clients withdraw the profits from their business and so we see this as going hand in hand with the small business tax cuts. When a profit is withdrawn, the reduction in company tax payable may have an impact of increasing tax payable by the individual due to a reduction in imputation credits available to attach to dividends paid.
We welcome the new definition of ‘small business’. Many of our clients have a turnover in excess of $2 million and have missed out on many of the current ‘small business’ concessions. In particular there is a great opportunity for businesses with a turnover up to $10 million to obtain an immediate tax deduction for depreciation on assets purchased (new or second hand) up to the value of $20,000 each. For example; motor vehicles, IT upgrades, machinery and other important business assets. This concession is extended to businesses up to $10 million from 1 July 2016 and ends 30 June 2017. If you are considering purchasing any new assets please contact us first to discuss/ensure eligibility.These measures will assist all our clients with reducing their tax burden, promote increased cash flow and enable them to grow their businesses.
This budget provides a great opportunity for unincorporated small businesses (trusts, partnerships, sole traders) to consider rolling over their businesses into a company given the tax discounts are more generous to companies than unincorporated small business. Should the announcements be legislated we will advise/assist clients (where appropriate) regarding the benefits of restructuring, including working through the ability to access capital gains tax roll-over relief.”
PERSONAL INCOME TAX
- Increase in the 32.5 per cent tax threshold from $80,000 to $87,000 until 2019-20
“The budget didn’t provide much in relation to personal income tax changes which is unusual in an election year. The “tax cut” to people earning over $80,000 is designed to lessen the burden of bracket creep – being where inflation pushes an individual’s wage to the next tax bracket increasing their marginal tax rate. As highlighted earlier we would have liked to have seen more in this area following to change in small business company tax rates where business owners draw profits out of their business.”
- $1.6 million superannuation transfer balance cap on the total amount of superannuation that an individual can transfer into retirement phase accounts. This puts a limit on taxpayer support for tax-free retirement phase accounts, but does not limit the savings that can be accumulated outside these accounts or outside superannuation. A balance of $1.6 million could support an income stream in retirement of around four times the level of the single Age Pension.
- Under the new rules those with combined incomes and superannuation contributions greater than $250,000 will be required to pay 30 per cent tax on their concessional contributions, up from 15 per cent. This extends the current treatment of people with combined incomes and superannuation contributions over $300,000. These individuals will still have significant incentives to save for their retirement. According to the Federal Government Budget website (budget.gov.au), this change will only affect around one per cent of superannuation fund members.
- Lower superannuation concessional contributions cap to $25,000 per annum. This level still enables individuals to make enough contributions over their working life to be self sufficient in retirement. Lower caps on concessional contributions also make it feasible to allow more flexibility across the system to accommodate modern working arrangements. Reducing the caps on concessional contributions will only affect around three per cent of superannuation fund members (source: budget.gov.au).
- $500,000 lifetime cap for non-concessional contributions. The lifetime cap will limit the extent to which the superannuation system can be used for tax minimisation and estate planning. Currently, less than one per cent of superannuation fund members have made contributions above this cap since 2007 (source: budget.gov.au).
“Whilst there were a number of changes in respect of superannuation, 96% of Australians (source: budget.gov.au) will not be adversely affected by the changes. It appears the government has looked to bring superannuation back to its original intention that of ‘providing a modest living in retirement’ as opposed to a wealth creation and tax minimisation tool for high wealth individuals.
We see these changes as being reasonable as they still provide a means for individuals to fund for their retirement in a tax effective environment. We would however like to see in time a progressive tax system for superannuation similar to personal income tax to account for lower income earners. The reintroduced Low Income Superannuation Tax Offset for individuals with adjusted taxable income of $37,000 or less goes someway to addressing this aspect.”
It is important to remember that at this stage these are announcements only. The proposed changes are not set in stone and could change as legislation passes through parliament.