Delivering his first Federal Budget on 3rd May 2016, Treasurer Scott Morrison said that tax breaks have been given to small businesses first as they are “more likely to reinvest their earning and more likely to be Australian owned.”
Increasing the small business turnover threshold from $2M to $10M
The change to the turnover threshold, from $2 million to $10 million, for small business concessions is excellent news and, in my view, it is good policy. The $2 million threshold was much too low, with many high turnover, low margin business’s previously disadvantaged. A $10 million threshold captures the majority of businesses with up to 20 or 30 employees, which is a far more reflective measure of the SME sector.
Gareth Atkins, Synectic
The Government will increase the turnover threshold for small business entities from $2 million to $10 million from 1 July 2016.
This will see close to a million Australian small businesses able to access a suite of small business concessions, including:
- Simplified depreciation rules – including the unlimited $20,000 instant asset write-off scheme and small business pooling
In particular, raising the threshold for the $20,000 instant asset write-off scheme (introduced in the 2015 financial year for businesses with annual earnings under $2 million) will allow around 100,000 more businesses to purchase or upgrade assets. The scheme is set to end on 30 June 2017.
- Trading stock election – Simplified rules allowing businesses, where the value of stock has changed by less than $5,000, the option to avoid the end of year stocktake.
- PAYG instalments – Allowing certain businesses to pay a quarterly PAYG instalment that is worked out based on the most recently assessed tax return
- Immediate deduction for certain start-up costs – Including deductions for professional fees
- Simplified GST rules – Including the option to account for GST on a cash basis and pay instalments as calculated by the ATO
The current $2M threshold will remain for the small business CGT concessions.
A $5M threshold will apply to the unincorporated small business tax discount (i.e. the increased 8% tax discount). See below for more.
Small businesses who qualify under the new $10M threshold will also be able to access the company tax rate reduction (i.e. the 27.5% rate announced in the budget). See below for more.
Reducing the company tax rate to 25% over 10 years
The newly defined SME sector will benefit from a decrease in the corporate tax rate from 30% to 27.5%, from 1 July 2016. Plans to further reduce this to 25% by 2026 and progressively expand eligibility to all business corporate taxpayers provide significant long term incentive to drive private company growth.
Gareth Atkins, Synectic
Eligible small and medium businesses (under the new turnover threshold of $10M) will receive a reduction in the company tax rate to 25% over 10 years.
The rate will firstly be reduced from 1 July 2016 to 27.5%. This will decrease the company tax rate for around 870,000 Australian companies.
Each year until 2022-23 the government will step up the annual turnover threshold to allow more businesses to access the 27.5% rate:
Once all companies can access the reduced rate the rate will be reduced to 27% and will continue to reduce by 1% each year until it reaches 25% in 2026-27.
Increasing the unincorporated small business tax discount
Since many small businesses are not companies (and would therefore not benefit from the reduced company tax rate), the government will also increase and extend access to the unincorporated small business tax discount.
The tax discount (known as the Small Business Income Tax Offset – or SBITO) is available to individuals who receive income from an unincorporated small business entity.
The tax discount will apply to unincorporated businesses with turnover of less than $5 million (increased from the current $2m threshold).
The current 5% discount will increase to 8% from 1 July 2016 then increase progressively.
The current SBITO cap of $1,000 per individual each income year will remain. While the increased discount is welcomed, this cap will restrict individuals from fully claiming the discount.
Read more about the 2016-17 Federal Budget:
- Federal Budget delivers tax relief for middle income earners
- Federal Budget signals significant changes to superannuation
If you have questions about how the budget measures might impact your business please contact our office to speak to one of our tax and business advisory professionals.