Federal Budget 2016–17 – what it means for small business
By now, you’ve likely seen the headlines from the 2016–17 Federal Budget. But what do the announcements really mean for you as a small business owner?
Below, we’ve outlined the key measures most relevant to our clients, along with our practical commentary on what they could mean for your business.
Small business
New definition of small business
From 1 July 2016, the definition of a small business expanded from an annual turnover of less than $2 million to less than $10 million.
This change brings many more businesses into the small business category and opens the door to a range of additional tax concessions.
Company tax rate reduction
For companies with an annual turnover of less than $10 million, the company tax rate reduced from 28.5% to 27.5%, effective 1 July 2016.
Access to small business tax concessions
From 1 July 2016, businesses with an annual turnover of less than $10 million can access:
- Simplified depreciation rules, including an immediate deduction for depreciating assets costing less than $20,000, available until 30 June 2017
Note – from 1 July 2017, this threshold returns to $1,000. - Simplified trading stock rules, allowing businesses to avoid an end-of-year stocktake where the value of stock has changed by less than $5,000
- Additional small business tax concessions, including certain fringe benefits tax (FBT) exemptions, aligned to the FBT year from 1 April 2017
It’s important to note that these expanded thresholds do not apply to the small business capital gains tax concessions. These remain limited to businesses with:
- annual turnover of less than $2 million, or
- businesses that satisfy the maximum net asset value test
Unincorporated small business tax discount
Recognising that many small businesses don’t operate through companies, the Government extended the unincorporated small business tax discount.
From 2016–17, the discount:
- applies to unincorporated businesses with turnover of less than $5 million (up from $2 million)
- increases to 8%, with a maximum discount of $1,000
Over the next decade, the discount will gradually increase to a final rate of 16%.
Our view – small business
Overall, we see these measures as positive for small business.
That said, we would have liked to see further reductions in personal income tax rates. Many of our clients extract profits from their businesses, so company tax cuts and personal tax rates often go hand in hand. In some cases, a reduction in company tax can actually increase personal tax payable due to fewer imputation credits being available when dividends are paid.
We strongly welcome the expanded definition of ‘small business’. Many of our clients have a turnover above $2 million and have previously missed out on valuable concessions. In particular, the ability for businesses with turnover of up to $10 million to immediately deduct assets costing up to $20,000 represents a significant opportunity.
This includes assets such as:
- motor vehicles
- IT upgrades
- machinery
- other essential business equipment
This concession applies to both new and second-hand assets purchased between 1 July 2016 and 30 June 2017. If you’re considering an asset purchase, we recommend speaking with us first to confirm eligibility and timing.
For unincorporated businesses – including sole traders, partnerships and trusts – this Budget also creates an opportunity to revisit business structures. Subject to legislation, company tax rates may be more favourable over time. Where appropriate, we’ll work with clients to assess restructuring options, including access to capital gains tax roll-over relief.
Personal income tax
The Budget included a change to the 32.5% tax bracket, increasing the threshold from $80,000 to $87,000 until 2019–20.
Our view – personal income tax
Personal income tax changes were limited, which is unusual in an election year. This adjustment is designed to reduce the impact of bracket creep, where wage increases push individuals into higher tax brackets over time.
As noted earlier, we would have liked to see broader personal tax relief, particularly given the changes to small business company tax rates and the way many business owners extract profits.
Superannuation
Several changes were announced in relation to superannuation, including:
- A $1.6 million transfer balance cap on the amount that can be transferred into retirement phase accounts
- An increase in tax on concessional contributions from 15% to 30% for individuals with combined income and contributions over $250,000
- A reduction in the concessional contributions cap to $25,000 per annum
- A $500,000 lifetime cap on non-concessional contributions
According to the Federal Government, the majority of these changes will only affect a small percentage of superannuation fund members.
Our view – superannuation
While there are several superannuation changes, the Government estimates that around 96% of Australians won’t be adversely affected.
Overall, these measures appear aimed at refocusing superannuation on its original purpose – providing a modest standard of living in retirement – rather than being used as a wealth accumulation or tax minimisation tool.
We see these changes as broadly reasonable, as they still allow individuals to save for retirement in a tax-effective environment. Over time, we would welcome a more progressive superannuation tax system to better support lower-income earners. The reintroduction of the Low-Income Superannuation Tax Offset for individuals earning $37,000 or less is a step in the right direction.
What happens next?
At this stage, these are Budget announcements only. The proposed measures are not yet law and may change as legislation progresses through Parliament.
If you have any questions about how these announcements affect your business or personal situation, please get in touch. We’re here to help you make informed decisions with confidence.
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.
If you have any questions regarding information included in this article please do not hesitate to contact us on (08) 8471 7007 or Email Us.
