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Small businesses with aggregated annual turnover of less than $10 million appear to be the winners under this year’s Federal Budget Ten Year Enterprise Tax Plan which is intended to encourage Australians to work, save and invest. 

Corporate tax rate reduction for small business entities

In a highly anticipated move, the Federal Government announced that it will reduce the company tax rate from 30 per cent to 27.5 per cent for all incorporated businesses with an annual aggregated turnover of less than $10 million with effect from 1 July 2016. 

The corporate tax rate is currently 28.5 per cent for small business entities (broadly, those with annual aggregated turnover of less than $2 million) and 30 per cent for all other companies. 

The threshold will then be progressively increased to ultimately have all companies at 27.5 per cent in the 2023-24 income year.  The annual aggregated turnover thresholds for companies facing a tax rate of 27.5 per cent is set out in the table below:

Income year Annual aggregated turnover threshold
2016-17 $10 million
2017-18 $25 million
2018-19 $50 million
2019-20 $100 million
2020-21 $250 million
2021-22 $500 million
2022-23 $1 billion
2023-24 No threshold

In the 2024-25 income year the company tax rate will be reduced to 27 per cent and then be reduced progressively by 1 percentage point per year until it reaches 25 per cent in the 2026-27 income year.

Franking credits will be able to be distributed in line with the rate of tax paid by the company making the distribution.  It is unclear how the phasing of the corporate tax reduction will apply to investment companies, i.e. non-business entities.  

The lowering of the small business corporate tax rate to 27.5 per cent, coupled with an increase of the qualifying threshold to $10 million from 1 July 2016 is expected to bring early significant cash flow benefits to those small businesses operated through corporate entities. 

However, the increased differential between the corporate tax rate and the top marginal tax rate will also have the effect of increasing the amount of ‘top up tax’ payable when private company profits are ultimately distributed to shareholders.  Small businesses will therefore need to consider the tax profile of their shareholders and their capacity to frank dividends when considering their annual dividend strategies. 

Increased concessions with an increased small business entity threshold 

The Government has announced that the small business entity turnover threshold will be increased from $2 million to $10 million from 1 July 2016.

Importantly, all business entities (incorporated or otherwise) that meet the new $10 million aggregated turnover test will be able to access the simplified depreciation rules, including the existing instant asset write-off scheme. This will allow them to claim an immediate deduction for depreciable asset purchases costing less than $20,000 until 30 June 2017. 

Increasing access to this scheme will provide significant incentives for many qualifying small businesses to increase their current capital expenditure spend.  However, the after-tax consequences of the proposed immediate deduction for depreciating assets should be considered.  If this results in a tax loss, there is no immediate cash-flow advantage.

Other concessions to which the increased $10 million threshold will apply from 1 July 2016 include:

  • Simplified trading stock rules, giving them the option to avoid end of year stocktake if the value of stock has changed by less than $5,000
  • A simplified method of paying PAYG instalments calculated by the Australian Taxation Office (ATO) which removes the risk of under or over-estimating PAYG instalments and the resulting penalties that may be applied
  • The option to account for Goods and Services Tax (GST) on a cash basis and pay GST instalments as calculated by the ATO
  • Other tax concessions currently available to small businesses, such as fringe benefits tax (FBT) exemptions (from 1 April 2017 to align with the FBT year)
  • A trial of simpler business activity statements (BAS) reducing GST compliance costs, with a full roll-out from 1 July 2017.  

The current $2 million turnover threshold will be retained to access the small business capital gains tax (CGT) concessions, and access to the unincorporated small business tax discount will be limited to entities with turnover less than $5 million.

The introduction of an increased small business threshold is a welcome move as not all small businesses were able to take advantage of the existing concessions due to the low threshold.  However, it is disappointing that the Government has not taken the opportunity to apply this $10 million eligibility threshold to all concessions targeted at small businesses.  

Small business thresholds will continue to be inconsistent despite this change.  This often leads to confusion and increased compliance costs due to the complexity of the rules applicable to the small business sector. For example, the small business CGT concessions require taxpayers to satisfy either the $6 million net asset value test or the $2 million aggregated turnover test. In contrast a $20 million aggregated turnover test applies for the R&D refundable tax offset rules and debt/equity rules.  

Private business could benefit from having a consistent set of thresholds applying, and would have greater access to these small business concessions if the thresholds were increased and indexed annually. 

Expanding the unincorporated small business tax discount 

The Government will increase the tax discount for unincorporated small businesses incrementally over 10 years from five per cent to 16 per cent.  The tax discount will increase to eight per cent on 1 July 2016, remain constant at eight per cent for eight years, then increase to 10 per cent in 2024-25, 13 per cent in 2025-26 and reach a new permanent discount of 16 per cent in 2026-27.   

The tax discount applies to the income tax payable on the business income received from an unincorporated small business entity.  Access to the discount will be extended to individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $5 million.  The current cap of $1,000 per individual for each income year will be retained.

Private company deemed dividends

The Government has announced that from 1 July 2018 it will make much needed amendments to improve the operation and administration of the private company deemed dividends rules (Division 7A of the Income tax Assessment Act 1936) based on the Board of Taxation’s 2015 Post-implementation Review into Division 7A.

These changes are intended to provide clearer rules for taxpayers and assist in easing their compliance burden while maintaining the overall integrity and policy intent of Division 7A.  The changes include:

  • A self-correction mechanism for inadvertent breaches of Division 7A
  • Appropriate safe-harbour rules to provide certainty 
  • Simplified loan arrangements and a number of technical adjustments to improve the operation of Division 7A and provide increased certainty for taxpayers.

We eagerly await the release of further details in relation to these measures.

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