Reduced tax rates for unincorporated small businesses

In line with the proposed reduction of the company tax rates, the Government also proposes an increase to the tax offset for unincorporated small businesses, namely sole traders, partnerships and trusts, will increase from 5% to 16% over a 10-year period.

The tax offset will initially increase to 8% from 1 July 2016, then to 10% in the 2024-25 year, 13% in the 2025-26 year and then the final rate of 16% in the 2026-27 year. However, the maximum discount will remain at $1,000.  For the purposes of accessing the tax offset, the turnover threshold is increased from $2 million to $5 million from 1 July 2016.

Aspect Comment

Again, the proposed increase of the tax offset rate is a welcome move. However, this is at best some tinkering as evidenced by the increase of the threshold to ‘only’ $5 million (as opposed to $10 million for other concessions) and the maximum allowable tax offset amount remaining at just $1,000.

Reduced company tax rates

Another long-awaited change for small businesses is the proposed reduction in the company tax rate to 25% over the next 11 income years. The current rate for small businesses (e.g. entities with an aggregated turnover of less than $2 million) is 28.5%. The rate will be reduced to 27.5% in the 2016-17 year (bearing in mind this will apply to businesses with an aggregated turnover of less than $10 million), remain at 27.5% for 7 years but with an increase in the turnover threshold for eligible companies, then reduce for all companies to 27% in the 2024-25 year, 26% in the 2025-26 year and 25% in the 2026-2027 year.

Budget 2016 Graph

As shown in the Government’s graph above, more and more companies will be eligible for the reduced tax rates over the next 8 tax years.  Importantly from a shareholders’ perspective, companies will still be able to frank dividends up to the rate of 30%, whilst they have sufficient credits.

Aspect Comment
Any reduction in tax rates is not be scoffed at and the immediate targeting of those lower rates to small and medium businesses is a welcome move, however the rationale of bringing corporate Australia into line with our trading partners seems hard to justify when it takes a further 10 years to reach corporate tax rates currently enjoyed by those countries.  Where will they be in 10 years and will we continue to play catch up?

Increase to the small business entity threshold

One of the most significant measures in the Budget for small businesses is the increase of the small business entity threshold from $2 million to $10 million effective 1 July 2016. This is significant considering the current $2 million threshold has been in place since 1 July 2007 and is well overdue for an increase in line with the current business environment.

This means, from 1 July 2016, businesses with an aggregated annual turnover of less than $10 million will be eligible for the various small business concessions, including the following:

  •  the proposed reduction in company tax rates,
  • the proposed increase of tax offset for unincorporated small businesses (bearing in mind the threshold of $5 million applies instead),
  •  immediate deductions for depreciating assets costing less than $20,000 until 30 June 2017 and less than $1,000 thereafter,
  •  the simplified depreciation rules for other depreciating assets under the Small Business General Pool,
  •  immediate deductions for business start-up costs, such as the professional fees and government charges,
  •  immediate deductions for most prepaid expenses under the 12-month prepayment rules,
  •  simplified trading stock rules, giving them the option to avoid end of year stocktake if the value of their stock has changed by less than $5,000,
  •  a simplified method of paying PAYG instalments calculated by the 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 GST on a cash basis and pay GST instalments as calculated by the ATO, and
  •  FBT exemptions for work-related portable electronic devices and car parking fringe benefits.

Unfortunately, the increase does not extend to the Small Business CGT concessions. This means the current threshold of $2 million for turnover and $6 million for the net assets still applies

Aspect Comment
While the move to increase the threshold is welcome, it is disappointing that this does not extend to the Small Business CGT concessions. The Government estimates that there will be over 90,000 businesses that will benefit from the increase of the threshold and we see the ability for more business to change their GST accounting to a cash basis as attractive to those experiencing delays in their debtor collection.  Given the current Budget predicament, perhaps it is not surprising that the Government has applied the brake and is holding off the increase of the threshold for the purposes of the Small Business CGT concessions and the new Small Business Restructure Rollover.

Gold Coast businesses under the ATO’s microscope

As part of an ongoing, Australia-wide program, the ATO has advised that it will be visiting restaurants, cafés and take-aways, along with hair salons and nail bars, on the Gold Coast.

Assistant Commissioner Matthew Bambrick said “In all, we’ll be visiting around 250 businesses in the Gold Coast to talk about a range of topics, including business registration, record-keeping, superannuation and lodgment.”

Where taxpayers are unwilling to work with us or continue to cause us concern, we will undertake further investigation.  In Sydney and Melbourne, for example, we have now moved to auditing businesses that didn’t want to work with us.”

New rules for selling property over $2 million

From 1 July 2016, new rules will apply to sales of taxable Australian property (e.g., real estate) with a market value of $2 million or above.

A 10% non-final withholding tax may be applied to all contracts to sell such property entered into on or after 1 July 2016.

Australian resident vendors selling such property  will need to obtain a clearance certificate from the ATO prior to settlement to avoid the 10% non-final withholding tax.

Editor:  This new 10% withholding tax was really only intended to apply to non-residents selling Australian property. 

However, it equally applies to Australian resident vendors and forces them to obtain a clearance certificate from the ATO to, in fact, prove that they are Australian residents.

Generally speaking, clients will be affected for sales of residential and commercial properties, or companies or trusts that hold such properties.