The Coalition Government has recently introduced the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 into Parliament which will increase the aggregated turnover threshold to small business tax concessions from $2m to $10m.
The bill has been referred to the Senate Economics Legislation Committee and as such is not yet law, however assuming the bill is passed by the senate many more taxpayers will be eligible to access the small business entity concessions. This is great news for taxpayers who carry on business with a turnover of more than $2m currently, but less than $10m. The proposed legislation will have effect from 1 July 2016.
If the bill is successfully passed, the tax concessions which will be available from 1 July 2016 to small business entities with an aggregated turnover of less than $10m will include:
|✓||Immediate deductibility for small business start-up expenses||✓||Roll-over for restructures of small businesses|
|✓||Access to the $20,000 instant asset write-off (until 30 June 2017)||✓||Accounting for goods and services tax (“GST”) on a cash basis|
|✓||Simpler depreciation rules||✓||Paying GST by quarterly instalments|
|✓||Simplified trading stock rules||✓||Annual apportionment of input tax credits for acquisitions and importations that are partly creditable|
|✓||Deductions for certain prepaid business expenses||✓||Pay-As-You-Go (“PAYG”) instalments based on gross domestic product (GDP)-adjusted notional tax.|
|✓||27.5% tax rate for corporate entities||✓||Fringe benefits tax (“FBT”) car-parking exemption (from 1 July 2017) and provision of two identical personal electronic devices to employees per annum (from 1 July 2016)|
Change in the Small Business Entity Tax Rate – Corporate Entities
It is noted above that the rate of tax has changed to 27.5% for small business entities carrying on business through a company. The corporate tax rate for small business entities with less than $2m of aggregated turnover for the year ended 30 June 2016 was 28.5%, with those with more than $2m to $10m subject to 30% tax. The reduction in tax rate will provide cash flow benefits to these corporate entities in the future.
The bill also proposes the gradual reduction in corporate tax rates over time with the turnover threshold increasing to incorporate all corporate taxpayers by the year ended 30 June 2024. Importantly, it appears that the reduced tax rate will only apply to entities carrying on a business, as such investment companies may not be eligible for the reduction in the corporate tax rate until the year ended 30 June 2024.
The tax rate is then proposed to reduce progressively for all corporate taxpayers to 25% by 30 June 2027.
Whilst the above is welcome news, the change in the tax rates for small business entities in the 2017 year (i.e. entities will less than $10m of turnover) will have the effect of limiting the franking credits applicable to any dividends it has paid or will pay in the 2017 to 27.5%. Companies with turnover greater than $10m, but less than $25m of turnover may therefore wish to maximise their amount of franking they can return to their shareholders in the 2017 financial year.
Unincorporated Business Entities
Whilst small business entities that are operated through a corporate entity have benefited from a reduction in the income tax rate to 27.5%, unincorporated small business entities will also enjoy an increase in the small business income tax offset from 5% to 8% per individual that is subject to taxation. However each individual’s entitlement to the small business income tax offset remains capped at $1,000, as such the higher rate of entitlement may not provide any significant additional benefits to sole traders and trusts with few beneficiaries.
Capital Gains Tax
Whilst the bill confirms that the $10m threshold will apply for the purposes of the Small Business Restructure Roll-over, it also confirms that the $2m threshold will apply for the purposes of the other Small Business Capital Gains Tax Concessions. Given this it will be important for taxpayers to remember which thresholds apply to their own circumstances.
The greater access to the small business concessions and the eventual reduction in the corporate tax rate is positive news for all taxpayers, however some taxpayers will be inconvenienced by the reduction in the ability to frank their dividends, particularly in the 2017 financial year.
Whilst unincorporated entities will also broadly benefit from the changes to access the small business concessions, the capping of the unincorporated small business income tax offset at $1,000 may not provide any meaningful change in the total tax paid by those unincorporated entities.
It will be interesting to see whether the government are able to get the proposed legislation through the senate without amendment and to see what compromises it may need to make in order to ultimately pass the legislation.
Should you have any further queries please contact your local RSM office.