Budget measures likely to become law (including a company tax cut)!
Quick update re some of the 2016 federal budget proposals
As we have no doubt mentioned before, we tend to take a lot of what is announced in the annual Federal Budget (including a company tax cut) with a grain of salt until such time as we actually see it become law.Well with the Liberals being returned to Government (just, for now, sort of) a number of the Budget proposals are on track to become law (probably).With Parliament returning this month, the following Bills have been introduced relating to tax matters announced in May –
- Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, and
- Treasury Laws Amendment (Income Tax Relief) Bill 2016
Company Tax Cut on its way
The first Bill provides a company tax cut for Small Businesses from the current 28.5% (which is already down from the long standing 30% rate) to an even lower 27.5%. The new rate will apply for this year (ie. from 1 July 2016 and being the 2017 Income Tax Year)!It also includes further reductions in the future, which ultimately will reduce the Company Tax Rate to 25 per cent (though not until 2026//27).At this stage we are still expecting this Bill to pass both Houses and become law. So our planning for this year allows for a Company Tax Rate of 27.5%. I will say though, even if the Bill becomes law and it provides for further rate reductions in the future, we will be taking a “believe it when we see it” approach. What can I say, there are a lot of Federal Budgets (and Federal Elections) to be held between now and 2026!
Where is all the controversy
On the topic of Company Tax Cuts, they do seem to promote controversy, particularly throughout the media and amongst various parties including I would suggest unions and individuals who are employees as opposed to business owners. In this regard I would like to provide a couple of comments …As far as tax cuts for companies operated by small businesses go, my honest opinion is that they actually mean very little to the majority of those small business owners. And certainly it results in little, if any, actual reduction in tax paid by the business owner.I say this as an experienced Chartered Accountant and Tax Adviser to small business owners, as an owner of multiple businesses, and as the person business owners come to for advice on how to run successful businesses and then how to minimise tax once the profits materialise.Explaining in detail why this is the case is probably for another newsroom post, but in short –
- Many (arguably most) small business owners spend all of their businesses profits each year,
- So, as long as they are paying their taxes legitimately (which I am sure the very vast majority are) then the actual rate of tax they pay is based on Individual Tax Rates, not the Company Tax Rate (even where a Company is part of their structure),
- The Company Tax Rate would therefore only effectively apply under two circumstances –
- The first being where the business owner has reinvested profits back into the business, in which case they will likely rely on the company tax rate,
- The second being where the business owner spends the profits personally, but chooses to use the company tax rate for the time being and effectively “delay” any top up tax as it applies to them personally.
Now as to the first scenario, it would be great if many small business owners had the ability to reinvest profits so as to grow their business, employ more people, and move the Australian economy forward. To be certain, it is a good thing if people are investing in businesses, in other people and the economy. So if the tax cut results in more investment, this is a good thing for everyone! But the honest truth is for most small business owners, they need every cent they can get their hands on just to live, so reinvesting ongoing earnings is something they always aspire to, but often can’t achieve, so the tax cuts I would argue have limited impact in this regard.As to the second scenario, yes there is the ability for a small business owner to “delay” paying tax, generally for up to seven years, and that may sound attractive. The truth is, we always discourage our Clients from using the strategy unless they have a very clear purpose for it. This is because we know the potential consequences (ie. a hole dug that they can’t get out of). For those who have used this strategy, I would be surprised if a majority would say, a few years later, it was a good idea and they are glad they used it!It is important to also note, the Bill not only provides a cut to the tax rate, it also increases the number of businesses that will qualify for the lower rate beyond Small Businesses as of 2017/18. We acknowledge, this particular element of the change is more controversial! Hopefully we will get to discuss this element of the changes in the future.
Other changes provided by these Bills
The other changes that will become law once these Bills are passed include –
An Increase to the Tax Discount for Unincorporated Small Businesses
Currently this offset, for Small Businesses that are not operated via a Company structure, is 5% of the tax payable on their business income. The changes means the rate will be 8% for this year (2016/17) and increasing to 13% in 2025/26.Sure, the increase this year will see a small reduction in the tax paid by some business owners. And if you saw that amount of money on the side walk you would pick it up. But I don’t think anyone is going to get ahead or retire based on this change alone.Again for now, we are ignoring the changes in 2024/25 and 2025/26.
A Small Business will now be defined as one that turns over less than $10m, increased from $2m
If you combine all the ‘concessions’ potentially available, it is definitely preferable to be considered a “small business” under the tax law, than not! These concessions exist to encourage people to start businesses and to “invest” in our economy, so as far as we are concerned they are good things (again, that discussion is probably for another day). But what is certain is that increasing the test threshold from $2m to $10m is a pretty big deal. There are obviously a lot more businesses that will qualify as “small”.I would like to mention, there are serious weaknesses to using “turnover” as the (sole) test of a small business. If you are talking about a business that primarily provides services (ie. an Accounting Business, or a Legal Firm, or other similar professional services or a business dealing in people power) a business that turns over $1m is of reasonable size, and one turning over just under $10m is a very real, I would argue “not small”, business! Having said that, for a business that manufactures, or even just sells products, turnover of $2m is probably barely enough to break even. And a turnover of $10m certainly doesn’t “ensure” a “big profit”.
Small Change to Individual Income Tax
The rate itself is not changing, however the Treasury Laws Amendment (Income Tax Relief) Bill 2016 will change the point at which the tax rate increases from 32.5% to 37% (excluding the Medicare Levy).So instead of the 37% rate kicking in at $80,000, it will now kick in at $87,000!This change will result in a maximum tax saving of $315 per annum for anyone earning over $87,000.Because this change effects everyone (as opposed to all of the above items that really only impact business owners) this modest tax cut will have a much greater impact throughout the economy.
There are arguably some even more important changes in the pipeline
It is likely the upcoming changes that are most important to a lot of people are the proposed changes to Superannuation.I have said it before, and I will say it again, it is a terrible fact that once again we are worrying about changes to superannuation. More and more, Clients are coming to me saying they “don’t want to talk super, they don’t trust the government not to take it all”.I don’t share this view, I am still yet to see any changes that greatly affect what you have accumulated to date, or that are grossly unfair or that make what you have done up till now inappropriate.But I 100% understand the sentiment, it seems like every successive government can’t help but get in and mess with the superannuation system, and for those that are not in the industry or otherwise fully across how it all works, I can see how easy it is to become disenfranchised.Well, “draft” legislation has been released, and a period of “feedback” has been set, so we will see what comes next!(I found this recent article by John Daley, Brendan Coates and William Young of the Grattan Institute on the topic to be very interesting, unbiased and balanced and well worth a read.)