RSM Australia

Small business tax cuts pass Parliament, but no relief for larger corporates

On Friday 31 March 2017, following an extended sitting of the Australian Senate, the Government achieved another political victory in the face of the brinksmanship which passes for the current Parliamentary process; a deal was struck with the Senate crossbench to pass a watered down version of the Government’s key economic policy initiative –the reduction of the company tax rate to 25% over 10 years.


Under the compromise deal, small and medium businesses will benefit:


  • as the company tax rate reduces to 25% over the 10 year period; and
  • the turnover threshold increases so that more company businesses can access lower tax rate.

The standard company tax rate will remain at 30% for companies with an annual turnover in excess of the small/medium business turnover cap.


For unincorporated small/medium businesses, there will be an increase in the rate used to calculate the small business tax offset. But the offset will remain capped at $1,000, so the offset will continue to be of limited practical effect; certainly not as advantageous as the small / medium business company tax cuts.


Dividend franking


For companies which remain subject to the standard corporate tax rate of 30%, there will be no change to the franking arrangements; they will continue to be able to frank dividends to a maximum of 30%. However, companies subject to the lower corporate tax rate will have a commensurately reduced ability to frank dividends, leading to a likely higher ‘top up tax’ payment required by the shareholder. [NOTE: this commentary has been updated to reflect the late release of the Government’s Senate negotiated changes.]


To read more about the available small business concessions, click here.


2017 Enterprise Incentives No. 1 Bill


This Bill, introduced into Parliament on 30 March 2017, will legislate two of the measures proposed in the Government’s December 2015 National Innovation and Science Agenda.  These measures apply to all businesses, not just small or medium businesses. 


First, a more flexible ‘similar business test’ will be introduced alongside the existing ‘same business test’.  Together, these tests will be known as the ‘business continuity tests’, and will apply in determining whether tax losses, capital losses and bad debts can be carried forward.  The new test will apply in the transfer test for losses in forming or joining a tax consolidated group.  The ‘similar business test’ will apply to income years commencing on or after 1 July 2015.


Second, an elective regime will be introduced for self-assessing the effective life of certain depreciable intangibles.  This change will apply to intangibles which are first ‘held’ on or after 1  July 2016.


These changes will be considered in further detail in a subsequent Tax Alert.


The tax cut changes in detail


The changes for small and medium business company taxpayers come in two forms. First, there is a reduction in the small business company tax rate from the current 28.5% to 25% over a 10 year period. Second, there is an increase in the turnover cap at which companies will be able to access the lower small/medium business tax rates. The so-called ‘glide path’ is set out in the following table.


Company tax rate reduction ‘glide path’











Income year

Turnover cap/lower tax rate

Standard tax rate

2015-2016

(current law)

$2 million turnover:

28.5%

> $ 2 million t/o: 30%
2016-2017

(changes forward)

$10 million turnover:

27.5%                             

> $10 million t/o:

30%

2017-2018

$25 million turnover:

27.5%                                    

> $25 million t/o:

30%
2018-2019

$50 million turnover:

27.5%                                                                           

>$50 million t/o:

30%

2019-2020

2020-2021

2021-2022

2022-2023

2023-2024

$50 million turnover:

27.5%

No change for 5 years

>$50 million t/o:

30%

2024-2025 $50 million t/o:

27%
30%
2025-2026 $50 million t/o:

26%
30%
2026-2027 $50 million t/o:

25%
30%

Small business tax offset for individuals


Currently, the offset is calculated at 5% of an individual’s net small business income, but with an annual cap of $1,000. 


The rate for calculating the offset will increase in accordance with the following table.


Net small business income







2015-2016 5%
2016-2017 8%
2024-2025 10%
2025-2026 10%
2026-2027 10%

In addition, a separate turnover cap of $5 million per income year will now apply to individual small businesses claiming the small business tax offset.


However, the aggregated turnover cap remains at $10 million for accessing the other small business tax incentives (apart from the small business CGT incentives – the existing eligibility criteria for which remain unchanged).


Observations


The company tax cut Bill was originally introduced into the Parliament in September 2016, and proposed to reduce the company tax rate from the current single rate of 30%, to 25% over a 10 year period, with an accelerated rate reduction timetable for small and medium businesses. In 10 years, there would be again a single company tax rate of 25%.


The compromise Bill sees tax reductions for small and medium businesses passed, but with no relief for larger businesses.


The Government trumpeted the compromise as a great victory, whilst the Opposition parties called the deal a ‘failure’, and a win for business at the expense of ‘workers’. When the hyperbole is put aside, and the details of the compromise considered, neither claim is supportable.


The Government’s ‘victory’ claim may be accepted if it is limited to a political victory – celebrating the passage of a key policy initiative through the current gridlocked Parliament may be considered a victory, of sorts. But it is not an economic victory, and given the energy expended in the debate, the result seems to sit equally as comfortably on the other side of the ledger.


As was widely and forcefully argued by the Government and the business lobby, Australia’s corporate tax rate, at 30%, is internationally uncompetitive in a world where company tax rates have again started to trend downwards. On this side of the argument, a reduction in company tax rate was considered an important factor in lowering the return on investment threshold for large company investments. It is big business investment which provides the capital necessary to improve the Australian economy’s performance, as was apparent during the investment phase of the resources boom.


The economic orthodoxy – that company tax cuts ultimately benefit workers through capital deepening, new and more hi-tech jobs, and higher incomes – is currently supported by Treasury, the Government, business, and leading international NGOs, such as the OECD, IMF, G20, amongst others. Until recently, it was also the economic view of the Federal Opposition, although the Opposition has now reversed that view.


But the compromise legislative package provides no tax relief for other than small and medium businesses, and whilst the SME sector is an important part of the Australian economy, it is not the sector which has the capacity to commit significant investment funds; nor to import next-generation technology; nor to provide the economy with the step-change it requires to return to the trend growth line.


On the other side of the argument, the charges from the Opposition are much overdone. With big business not receiving any benefit from these changes, there will be a significantly smaller loss to revenue; it seems the loss to government revenue through a general company tax cut lies at the heart of the Opposition criticisms. (Nevertheless, the smaller revenue cost flowing from the small/medium business tax cuts will require the Opposition to rethink some of the intended spending measures on its current policy agenda.)


The drafting changes which will deliver the compromise Bill, have retained the structure of the Government’s original proposal. It might be assumed that, at some point over the next 10 years, if the balance of power in the Parliament shifts towards the Government, the push to extend the lower company tax rate to larger corporate’s will resurface. Whilst it may be that this compromise Bill has settled the political issue of company tax cuts for the moment, it is likely that business pressure will maintain the economic issue close to the policy frontlines.


Planning opportunities


For those small and medium businesses that do not currently operate through a company structure, the tax rate reduction may warrant a review of those arrangements. Any structural change would require a wide ranging and careful review, taking into account many factors, but the locked in company tax rate cut may be a sufficient reason to give close consideration to a move into a company structure.


If you have any questions in relation to these latest changes, please contact your RSM tax adviser or Craig Cooper.

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