RSM Australia

Budget 2016 - Property & Construction

Key announcements

  • No changes to negative gearing as expected. 
  • National Infrastructure Plan – the Government reaffirmed its commitment to invest $50 billion in infrastructure in relation to various projects across the States and Territories.
  • Reduction in the company tax rate to 27.5% from 1 July 2016 for businesses with a turnover of less than $10 million.
  • The current 5% tax discount for sole traders to be increased to 8% from 1 July 2016 (although the cap of $1,000 still remains). 
  • Capital allowance, GST and reporting concessions available for small businesses extended to businesses with a turnover of less than $10 million. 
  • A new Tax Avoidance Taskforce will be established to target large private groups and high wealth individuals.

The construction industry is a significant driver of economic activity in Australia. It is Australia’s third largest industry, behind only mining and finance.  It compromises close to 350,000 businesses nationwide and is mainly comprised of businesses with less than 20 employees [Source: ABS: Counts of Australian Businesses, June 2015].

While the industry will breathe a sigh of relief that there were no surprises in the 2016 Budget (e.g., no changes will be made to negative gearing), the expected ease in the growth of dwelling investment to only 1% by 2018 will dampen any excitement concerning the extension of concessions for small business (e.g., the $20,000 immediate write-off for depreciating assets) to businesses with a turnover of less than $10 million. 

Some of the Budget 2016 announcements relevant to the industry include:

  • There will be no changes made to negative gearing as expected.
  • A new Tax Avoidance Taskforce will be established to target large private groups and high wealth individuals in high risk areas (no doubt the building and construction industry being one of those areas).  Accordingly, large private groups in the industry can expect to be under greater ATO scrutiny.
  • The Government will increase the tax discount for unincorporated small businesses (e.g., sole traders) with an annual turnover of less than $5 million) incrementally over 10 years from 5% to 16%.  The tax discount will increase to 8% on 1 July 2016.  However, the current cap of $1,000 per individual for each income year will be retained.
  • The company tax rate for businesses with an annual aggregated turnover of less than $10 million will be reduced to 27.5% from the 2016/17 income year.
  • From 1 July 2016, all businesses with an annual aggregated turnover of less than $10 million will have access to small business concessions such as the immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2017 (then $1,000 thereafter) and the option to account for GST on a cash basis.

Winners

Small businesses (<$10 million turnover)

Losers

Large private groups and high wealth individuals

Case Study 1

Bob is a sole trader that operates as an independent contractor in the building and construction industry.  Bob’s taxable income from his construction business amounts to $150,000.  Bob earns no other income.  Under the current rules, the tax discount is 5%.  From 1 July 2016, this increases to 8% with a maximum discount of $1,000.

Bob will pay approximately $45,132 (including the Medicare levy) in tax under the new rules which provides a saving of $1,315.  The tax discount for sole traders amounts to $1,000 of this saving.             

Case Study 2

Bill operates a profitable plumbing business via his company Drain Away Pty Ltd. During the 2016/17 year the company has an aggregated turnover of $2,500,000 and taxable income of $190,000. On 4 July 2016 Drain Away Pty Ltd acquires 2 new mini excavators for $18,600 each excluding GST.

Under the current law, the company will not be classified as a small business. Drain Away Pty Ltd is required to depreciate the excavators using an effective life of 20 years. By using the diminishing value method of depreciation, the company can claim a tax deduction for the excavators of $3,688. This deduction will reduce the company’s 2016/17 taxable income to $186,312, giving rise to a tax liability of $55,894 based on a company tax rate of 30%.

Under the new law, the company would be classified as a small business and would be entitled to the new small business tax rate of 27.5% from 1 July 2016.

Due to the excavators costing less than $20,000 each, the company will be entitled to an immediate tax deduction of $37,200 in the 2016/17 year. This will reduce the company’s taxable income to $152,800, resulting in a tax liability of $42,020, with a company tax rate of 27.5%.

This will result in the company receiving a cash flow benefit of $13,874 in the 2017 financial year.

Authors

Paul Heiler
Partner - Sydney
Ian MacPherson
Associate Director - Sydney