Pending approval of May’s announced 2016-2017 Federal Budget, warrants a timely review of proposed changes for a much wider catchment of small business entities.

Now that some of the Federal Budget 2016-17 has successfully passed, it’s worth recapping on the biggest fallouts for SMEs within the Treasury Laws Amendment (Enterprise Tax Plan).

Effective 1 July 2016, the corporate tax rate for small business entities reduces from 28.5% to 27.5%. The definition of small business entities has also been widened from $2m to include an estimated 90,000 business entities with aggregated turnover less than $10m.

For those small businesses operating through corporate entities previously subject to 30% tax, the early cash flow benefits resulting from a reduced tax rate to 27.5% are significant.

Dividend considerations

Nevertheless, the increased differential between the corporate tax rate and the top marginal tax rate will effectively increase the amount of 'top up tax' payable when private company profits are ultimately distributed to shareholders. As a result, small businesses will need to consider the tax profile of their shareholders and their capacity to frank dividends when considering their annual dividend strategies.

Unincorporated businesses

Having recognised that many small businesses are not companies, the government has also extended the unincorporated tax discount to unincorporated businesses with annual turnover of less than $5m and increased the discount from 5% to 8% 1 July 2016, up to a maximum value of $1,000.

GST, CGT and depreciation considerations

Lower tax rates aside, other benefits enjoyed by a significantly larger pool of small businesses include access the simplified depreciation rules, including the existing instant asset write-off scheme, and the option to account for GST on a cash basis (rather than accruals) or to pay GST by instalments (as prescribed in the GST law).

It’s important to note that while the $10m threshold applies for the purposes of the Small Business Restructure Roll-over, the $2m threshold will apply for the purposes of the other Small Business Capital Gains Tax Concessions.

Other small business concessions

Included within other small business concessions that apply from July 1, 2016 are:

  •  simplified trading stock rules, giving the option to avoid end of year stocktake if the value of stock has changed by less than AU$5,000
  • a simplified method of paying pay as you go ('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
  • fringe benefits tax ('FBT') exemptions (from April 1, 2017 to align with the FBT year)
  • a trial of simpler business activity statements reducing GST compliance costs, with a full roll-out from July 1, 2017