- Increase in small business entity turnover threshold from $2 million to $10 million;
- Increase the unincorporated small business tax discount;
- Amendment to Division 7A to allow self-correction for inadvertent breaches.
The Government has acknowledged that small businesses are a key component of our economy and are proposing to increase the small business entity turnover threshold from its current $2 million threshold to $10 million. From 1 July 2016 all businesses with a turnover of less than $10 million will have access to the following concessions:
- Simplified depreciation rules such as pooling and an immediate deduction for assets costing less than $20,000 up until 30 June 2017;
- Simplified trading stock rules whereby a year end stocktake is not required if the value of stock has changed by less than $5,000;
- The option to make PAYG instalments using the ATO instalment amount rather than calculating themselves;
- Option to account for GST on a cash basis rather than an accruals basis;
- More generous Fringe Benefits Tax exemption for work related portable electronic devices (to apply from 1 April 2017);
- Access to the 12 month prepayment rule concession;
- Option to trial a simpler Business Activity Statement format which is proposed to reduce GST compliance costs.
These changes should reduce the compliance and tax cost for small to medium taxpayers and stimulate spending over the next 12 months with the $20,000 immediate write-off for depreciating assets being available to more taxpayers.
One key point to note is that this threshold increase does NOT apply to the small business capital gains tax concessions. For capital gains tax concession purposes the turnover threshold will remain at $2 million and the maximum net asset value test will remain as $6 million.
In the 2015/16 Budget the tax discount for unincorporated small businesses eg, partnerships and sole-traders was introduced. The current tax discount of 5% will increase to 8% from 1 July 2016 and will incrementally increase to 16% over 10 years. The Government will also increase the turnover threshold for these taxpayers from $2 million to $8 million.
The Government has also announced targeted amendments to Division 7A which will assist closely held private groups. Detail on the exact changes has not been released however, the Budget paper states:
- A self-correction mechanism will be implemented for inadvertent breaches of the rules;
- Appropriate safe-harbour rules will be introduced to provide certainty;
- Simplified Division 7A loan arrangements will be introduced; and
- A number of technical amendments will be made to improve the operation of Division 7A and provide increased certainty to taxpayers.
Any changes which aim to ease the burden of Division 7A are welcome as the current Legislation is inflexible and does not easily allow for corrections for genuine mistakes made by taxpayers.
Growing businesses which have a turnover that has exceeded the $2 million threshold will welcome the proposed increase in the turnover threshold. This will open up to them a raft of concessions which should ease their compliance burden and tax cost. The general business economy will also welcome this change as they are likely to find over the next 12 months more businesses are willing to invest in capital assets due to being able to claim an outright tax deduction for assets costing less than $20,000. Be prepared to hear more year end tax planning ads on your radio from electrical retailers!
There are no key losers if the proposed changes become law.
Mark and Adam currently own a company, MA Bakeries Pty Ltd, through which they operate two bakeries in Western Australia. During the 2016/17 year the company has an aggregated turnover of $2,500,000 and taxable income of $190,000.
Mark and Adam purchased 2 new baking ovens costing $18,600 each (exclusive of GST) on 4 July 2016 in order to expand the baking capacity of the bakeries and to increase the sales to nearby restaurants and hotels.
Under the current law, the company will not be classified as a small business. Adam and Mark are required to depreciate the ovens using an effective life of 20 years. By using the diminishing value method of depreciation, the company can claim a tax deduction for the ovens 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 ovens 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.
It is important to note that the changes to the small business turnover threshold are for income tax purposes only and does not impact the capital gains tax concessions, which remain at their current level of $2 million. Further, the immediate tax deduction for assets costing less than $20,000 is only until 30 June 2017.