Key budget changes for businesses

Small businesses in particular should benefit from these changes, which include:

Company tax rate reduction

Over the next decade, the company tax rate will be reduced to 25 percent for all business, with small businesses benefiting earliest.

From 1 July 2016 the company tax rate for small businesses – defined as those with an aggregated turnover of less than $10 million – will be reduced from 28.5 percent to 27.5 percent.

Over time, this reduction will be extended to larger companies – those with a turnover of less than $25 million will be eligible for the 27.5 percent rate from 1 July 2017, and those with a $50 million turnover from 1 July 2018.

Each year the threshold will increase until all companies, regardless of size, will be able to apply the 27.5 percent tax rate from 1 July 2023.

From then, the tax rate for all companies will be reduced to 27 percent, then by additional percentage points each year until all companies are taxed at 25 percent from 1 July 2026.

Franking credits will continue to be calculated in the usual manner, by reference to the amount of tax paid by the company making the distribution.

Small business threshold

The small business threshold will increase from $2 million to $10 million from 1 July 2016. This means that any business with an aggregated turnover of less than $10 million will be eligible for a number of small business tax concessions that were previously unavailable to them.

They include:

• the simplified depreciation rules;
• the simplified trading stock rules;
• a simplified method of paying PAYG instalments calculated by the ATO;
• the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;
• immediate deductibility for various start-up costs;
• a 12-month prepayment rule; and
• a more generous FBT exemption for work-related portable electronic devices.

This is a particularly beneficial change for financial planning practices with a turnover of less than $10 million.

Perhaps the most useful concession is the accelerated depreciation write off for purchasing assets costing up to $20,000. This allows small businesses to acquire depreciable assets costing less than $20,000 and claim an immediate tax deduction.

It applies to assets installed and ready for use prior to 30 June 2017, and there is no limit on the number of assets that each business can claim for.

The primary benefit is that it allows businesses to claim an up-front tax deduction instead of spreading the tax saving over several years, thus creating a beneficial cash-flow impact.

For example, a financial planning practice might update its computer equipment, data servers and telephone system, or undertake an office refit involving new furniture (boardroom table, reception desk, employee workstations and kitchen benchtop etc), fittings such as blinds, carpet and lights, and kitchen appliances such as a fridge and dishwasher.

Provided each individual item costs less than $20,000, the practice will receive an outright tax deduction in the year the amounts are paid, instead of having to write off the costs over the expected life of the asset under the normal tax depreciation rules.

In the above example of the office refit undertaken during the 2017 tax year, claiming an outright deduction for capital costs totaling $100,000 would provide an immediate tax saving of $27,500, even after the additional reduction in the company tax rate.

Under the regular depreciation rules these deductions would on average be spread over 5 years or more (since the rate varies according to the expected useful life of the asset – carpet is generally likely to last longer than electrical appliances, and the depreciation rate for the new carpet is therefore lower than for the dishwasher) – quite a valuable timing benefit.

For practices will total revenue exceeding $2 million these concessions will not be available for assets acquired during the 2016 tax year. Once the eligibility threshold rises to $10 million, however, many more such businesses will be able to claim an outright tax deduction for capital items acquired after 1 July 2016, and this could make a significant difference.

Also, as advisors become increasingly mobile and spend more of their time out meeting with clients, practices will benefit from the more generous exemption for portable electronic devices. If we're not there already, it won't be long before every employee expects to be provided with a smartphone, laptop, tablet or all three to allow them to do their job.

CGT concessions

It is important to note, however, that this threshold does not apply for the small business capital gains tax concessions. This means that only businesses with an annual turnover of less than $2 million (or that satisfy the maximum net asset value test and other relevant conditions such as the active asset test) can apply for these concessions.

However, for those businesses that do meet the $2 million threshold, these CGT concessions remain very attractive. In particular, the CGT rollover release for those small businesses that restructure due to expansion, is very useful.

Typically a small business may start out as a sole trader or partnership, and as it grows there is a need to use other types of structures such as companies and trusts. Changing the structure may currently trigger CGT liabilities, which become a barrier to restructuring and further efficiencies.

Unincorporated businesses

To complement the company tax rate reductions, the tax discount (or tax offset) for unincorporated small businesses (eg sole traders and partners in a partnership) will increase over a 10-year period from 5 percent to 10 percent.

The tax discount will increase to 8 percent on 1 July 2016, then increase to 10 percent in 2024–2025 and 13 percent in 2025–2026, reaching a new permanent discount of 16 percent in 2026–2027. The maximum value of the discount will remain at $1,000.

From 1 July 2016, 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 threshold is $2 million).

Peter Bembrick is a tax partner with accountants and business and financial advisers HLB Mann Judd Sydney