Excited about company tax cuts? They aren’t all sunshine and roses! – Part 1

Company Tax Cuts are Good News, at First Glance

If you are an ambitious small business owner, utilising corporate structures is pretty much a necessity.

If nothing else, it signals the legitimacy and bona fides of the business and its owners.

Though much more importantly it provides opportunities for tax minimisation and is a foundational element in any sound asset protection strategy.

So, news of cuts to company tax rates over recent years would have been well received by the majority of small business owners across the country.

Sting in the Tail

However, as we have discussed before, including in some of our YouTube videos, while the Government have promoted company tax cuts as a boon for Australia’s small businesses and its economy, we feel the benefits are at best overstated, at worst, non-existent.

Further, they actually represent another opportunity for small businesses to fall foul of the rules, and even worse, to overpay tax unnecessarily, if their accountant is not able to identify and address the resulting tricks and traps.

Company Tax Rates

Let us briefly explain…

The company tax cuts have been an ongoing saga and political football for some time, but for the majority of Australia’s companies, they are now a reality.

The table shows the company tax rate over recent and coming years that will apply to most small businesses (now known as a “Base Rate Entity”) –

Incidental Changes

Of course, as ever when it comes to Australia’s tax laws, and in particular where an announced change is as much about votes as anything else, there are complicated rules applicable as to determining a business’ qualification for these reduced rates (remember, if you don’t qualify as a Base Rate Entity, the 30% rate still applies).

Further, as tinkering occurred to the new rules to ensure they delivered just enough votes, without actually giving away too much tax savings, even more complicated consequential impacts arose.

In that regard, we are referring to changes to the imputation system, the system whereby shareholders in companies receive credits for the tax already paid by the company (in order to avoid double taxation).

Who the Company Tax Cuts Really Benefit

So, lets get something very clear…

Company tax rate cuts actually only benefit two groups of taxpayers –

1. Companies whose shareholders can afford to leave their profits in the company to help fund growth, and

2. Foreign owners of Australian companies!

If you are in the first category, the tax cuts are great news. Your company will pay less tax today, which means more cash retained in the business, which can be used to grow and expand. This is a big win for you, your employees, the economy and the country.

However, the vast majority of small business owners cannot afford to leave their profits in their company, certainly not for any extended period of time. They need to take most of them out in order to pay living expenses.

If you are in the second category, well good luck to you. Though I doubt you were the intended primary beneficiary of the rules when announced. Nor is it likely the majority of Australian small business owners will be particularly enthused to hear this revelation!

Effective Increase in Tax for many Small Businesses

Thought that was bad enough, now here is the real kick in the pants…

The company tax cuts will actually result in many Australian small businesses paying more tax!

“How can that be?” I hear you scream!

We will explain further in Part 2 in coming days…

Or better yet…

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