Small business is a sector that came out a clear winner from this year’s Federal Budget. In an effort to support growth and employment, announcements included: tax cuts for every small business; accelerated depreciation for assets less than $20,000; an immediate tax deduction for professional expenses; CGT roll-over relief; and FBT changes for electronic devices.
“… tonight, I am announcing a package of measures that will make a genuine and permanent difference to small business in Australia.”
(Treasurer Joe Hockey)
The government announced a “Growing Jobs and Small Business” package to assist small businesses. Broadly, small businesses with an aggregated annual turnover of less than $2 million will be eligible for the below concessions.
Tax cuts for small business companies and unincorporated entities
The government will deliver a tax cut to all small businesses through:
- a 1.5% tax cut for small companies, and
- a 5% discount on tax payable on income from unincorporated small business activity.
According to the government, this measure will deliver lower taxes to both incorporated and unincorporated small businesses, improving their cash flow and assisting them to grow, compete and hire new workers. These tax cuts will be available from the 2015 16 income year.
i. 28.5% tax rate for ‘small’ companies
The government will reduce the company tax rate from 30% to 28.5% for small companies with an aggregated annual turnover of less than $2 million. Companies with an aggregated annual turnover of $2 million or above will continue to be subject to the current 30% rate on all their taxable income.
Importantly, the current maximum franking credit rate for a distribution will remain unchanged at 30% for all companies, maintaining the existing arrangements for investors, such as self-funded retirees. This should allay the fears of the small business community that the tax cut would merely have resulted in “mum and dad” shareholders of family companies paying the extra 1.5% in top-up tax.
ii. 5% discount on tax payable by unincorporated ‘small’ businesses
Individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million will be eligible for a small business tax discount.
The discount will be 5% of the income tax payable on the business income received from an unincorporated small business entity. The discount will be capped at $1,000 per individual for each income year, and delivered as a tax offset.
This caters for the vast majority of small businesses that are not companies. The budget papers were silent as to whether an individual who receives income from a trading trust is entitled to this discount. The devil will be in the detail once draft legislation is released.
Temporary accelerated depreciation for small business assets costing less than $20,000
The government will significantly expand accelerated depreciation for small businesses by allowing small businesses with aggregate annual turnover of less than $2 million to immediately deduct assets they start to use or install ready for use, provided the asset costs less than $20,000.
The benefit however has a time limit, and only applies until June 30, 2017. This measure will apply for assets acquired and installed ready for use between 7.30pm (AEST) May 12, 2015 and June 30, 2017.
Note that if a single asset costs more than $20,000, the entire value must be allocated to a depreciation pool (see below).
The government also announced that it will suspend the current “lock out” laws for the simplified depreciation rules until June 30, 2017. The lock out rules prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out.
Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed in the small business simplified depreciation pool (the pool) and depreciated at 15% in the first income year and 30% each income year thereafter.
The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).
From July 1, 2017, the thresholds for the immediate depreciation of assets and the value of the pool will revert back to existing arrangements.
Immediate deduction for professional expenses
The government will allow businesses to immediately deduct a range of professional expenses associated with starting a new business, such as professional, legal and accounting advice. Currently, some professional costs associated with a new business start-up are deducted over a five year period. This measure will apply from the 2015-16 income year.
CGT roll-over relief for changes to entity structure
The government will allow small businesses with an aggregated annual turnover of less than $2 million to change legal structure without attracting a CGT liability at that point. This measure will apply from the 2016-17 income year.
CGT roll-over relief is currently available for individuals who incorporate, but all other entity type changes have the potential to trigger a CGT liability. This measure recognises that new small businesses might choose an initial legal structure that they later find does not suit them when the business is more established.
FBT changes for work related electronic devices
The government will allow a FBT exemption from April 1, 2016 for small businesses with an aggregated annual turnover of less than $2 million that provide employees with more than one qualifying work related portable electronic device, even where the items have substantially similar functions.
Currently, an FBT exemption can apply to more than one portable electronic device used primarily for work purposes, but only where the devices perform substantially different functions.