Immediate Deductibility for professional start-up expenses
Starting from the 2015/16 Financial Year (1 July 2015), the government will allow small businesses (a business with aggregated turnover of less than $2m) to immediately deduct a range of professional expenses associated with starting a new business including professional, legal and accounting advice.
Current Tax Law deems such start-up costs to only be deducible over a five year period. This change will allow small businesses to claim these up front in the year they are incurred and will provide some cashflow assistance from tax savings in the start-up years of a new business.
Accelerated Depreciation for Small Business
The Treasurer announced some welcome news for small businesses – they will now be entitled to an immediate deduction for assets acquired costing less than $20,000.
This will apply for all assets acquired and installed ready for use between the period 12 May 2015 and 30 June 2017.
In addition, small businesses that acquire assets costing more than $20,000 can continue to allocate these assets to the small business depreciation pool. A deduction will be allowed for the pool value where its balance falls below $20,000 over this period.
With a previous write off amount of only $1,000, small business owners may wish to consider bringing forward any plans for asset acquisitions with a value under $20,000 that will be installed and ready for use before the end of the financial year.
Unfortunately the announcement is silent on whether second hand assets will be eligible to be written off or if it will be limited to new assets. In addition the government has chosen to not to index the existing $2m dollar threshold for small business potentially excluding many small businesses simply through the effects of inflation on their turnover.
Tax Cuts for Small Business (incorporated entities)
With effect from the 2015-16 income year, small companies will benefit from a 1.5% cut in the company tax rate. This cut will reduce the company tax rate applying to those businesses to 28.5%.
The benefits of this cut will first be seen by eligible companies with Pay As You Go (PAYG) instalments, as each PAYG instalment can be calculated using the lower 28.5% rate rather than the existing 30% rate.
Importantly, the maximum franking credit rate for a distribution will remain unchanged at 30% for all companies. This will maintain the existing arrangements for investors such as self-funded retirees.
Companies with an aggregated annual turnover of $2m or above will continue to be subject to the current 30% rate on all their taxable income.
Small Business Tax Discount (unincorporated entities)
As the 1.5% company tax cut only applies to incorporated entities – unincorporated small businesses (ie Individuals, Trusts and Partnerships) will be able to access a surprising, but welcome 5% tax discount.
From 1 July 2015, individual taxpayers with business income from an unincorporated business that has an aggregated turnover of less than $2m will be able to access a 5% discount on the income tax payable on business income.
This discount will be capped at $1,000 per individual for each income year (ie $20,000 of income tax payable). It will be delivered as a tax offset through their end of year tax return.
Accelerated Depreciation for Primary Producers
To assist the tax cash flows of primary producers, the government has announced that an immediate deduction will be provided in respect of the acquisition and installation of fencing and certain water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills.
Further, the cost of fodder storage assets, such as silos and tanks used to store animal feed and grain will be eligible for depreciation over a three year term.
These changes will provide primary producers with greatly accelerated deductions for the cost of capital assets and assist in reducing their tax liability in the year of expenditure. The Commissioner of Taxation’s current effective lives for fences is 30 years and fodder storage assets is 50 years.
Unfortunately for primary producers, the announcement is not due to take effect until 1 July 2016, which means that primary producers may not be able to defer the purchase of such assets and gain these benefits. It is not stated how assets acquired prior to this date will be transitioned into the new regime.
Capital Gains Tax roll-over relief for changes to entity structure
Small businesses with an aggregated turnover of less than $2m will be permitted to make changes to their legal structure, such as moving from a trust to a corporate structure, without running the risk of triggering a Capital gains tax (CGT) event.
This change will allow small businesses to operate in a structure that suits their operations at inception rather than potentially being burdened with unnecessary regulations caused by having to plan for potential future growth. The rollover relief will be available for rollovers occurring in the 2016-17 year onwards.
Fringe Benefits Tax system for work-related electronic devices
Where a small business provides an electronic device (such as a laptop) to an employee predominantly for work related purposes this is exempt from FBT under current legislation. Where more than one device is provided these can also be exempt provided the devices perform “substantially different” functions. This has the potential to cause uncertainty where similar devices such as tablets and laptops are provided.
To avoid any confusion the government has removed this restriction effective 1 April 2016. It is now possible for multiple electronic devices to be exempt even where they share a large amount of functionality with another device (ie laptop and tablet, tablet and smartphone).
Case Study 1
Bob and June are carrying on a primary production business as a partnership. Their turnover is less than $2m per annum and they are classified as a small business entity. Bob and June need to install some new fencing for $10,000 as well as acquire and install a $60,000 new silo for feed. They also wish to buy a vehicle worth $19,000 for the business.
Under the current provisions:
- the fencing would likely be depreciable over thirty years
- the silo would likely be depreciable over fifty years
- the vehicle would likely be depreciable over eight years
- they will pay income tax at the same rates as other individual taxpayers (e.g. employees)
Under the proposed provisions:
- the fencing of $10,000 would be deductible in the year incurred
- the $60,000 silo would be depreciable over three years
- the vehicle would be deductible in the year incurred as the partnership is a small business entity and the cost is less than $20,000
- their business income would be eligible for the discount applied to a value of $1,000 each
If Bob and June were subject to a tax rate of 39% (including Medicare levy), they could expect to save tax of up to $17,550 as a result of the proposed announcements.
Case Study 2
Mark currently operates a hobby store through a Trust which is a small business entity. His trading activities are increasing and he wishes to incorporate Trains, Planes and Automobiles Pty Ltd to carry on his activities.
Under the proposed provisions:
- he would be entitled to capital gains tax rollover relief such that no CGT is payable on the transfer of the assets
- professional costs incurred to incorporate the company would be deductible to the company when incurred
- the company would be taxed at 28.5% as a small business entity