Company tax cuts are now reality, good, bad, indifferent?

Company tax cuts big news this morning

So if you are a Client of ours, a small business owner or just someone interested in business and finance news, you will most definitely have noticed some big headlines in your papers this morning. One is APRA’s further clamp down on bank lending, specifically interest only loans, the other is of course the Turnbull Governments, supposedly big, win in the Senate yesterday with company tax cuts now secured.I will talk more about the interest only loans in another post, but here lets explore the company tax cuts.

Company tax cuts – The Details

• Companies operating a business with a turnover less than $10m, have their tax rate reduced to 27.5% for this year (2016/17) and for the future
• Companies with a turnover less than $25m but above $10m, have their tax rate reduced to 27.5% but not until next year (2017/18)
• Companies with a turnover less than $50m but above $25m will have to wait until the following year (2018/19) to receive the same cut to 27.5%
• Companies with a turnover above $50m retain the 30% tax rate, though the Governments 10 Year Plan includes reducing this rate as well, but it sounds like the legislation for this won’t be considered until after the next election (if at all)

I am not an economist, so I won’t go into the big picture issues of Australia’s international competitiveness and the macro economic theories regarding reducing of taxes. But as far as our Clients and small businesses in general are concerned …The big change, is that effective immediately (so this 2016/2017 financial year) the company tax rate drops to 27.5%.  Now I have seen some comments or quotes stating the company tax rate has been cut for these businesses by 2.5%. That is somewhat misleading. These businesses already received a company tax cut effect last year (2015/2016) to 28.5% (down from 30%). We also frankly had also been expecting the 27.5% tax rate for this year (it was part of the 2016 Federal Budget announcements) and while of course we knew all along it still had to be passed, this is the rate we had been using when planning and budgeting for our Clients.Larger (but still considered small to medium) businesses receive there cuts over the next two years and in those cases the rate cut really is 2.5%, as they did not enjoy the reduction from last year.

What do the company tax cuts really mean for genuine small businesses

You may have read me discussing this previously, but the honest truth is for a large proportion of small businesses, the rate cut means very little, in fact for some it could be a bad thing!A large proportion of small businesses don’t actually pay tax via a corporate entity, sure most will have a company in their business structure, but often it is simply acting as trustee of a trust, it is not itself a taxing point. So for those businesses, the cuts mean nought!Even for those that do have a corporate entity paying tax, a significant percentage don’t actually leave the profits they generate in that company. Instead they draw them all out to meet their personal expenses and to maintain their lifestyles. For these people, the cuts may provide a small timing benefit, but ultimately all of the profits earned and spent will be taxed in the individual recipients’ names, at their marginal rate (which effectively tops out at 49%).  For those businesses who do actually reinvest their business profits back into their business and do so utilising a (taxed) corporate entity, the good news is these cuts are for you, and you will be the ones to benefit the most. Because quite simply, you will pay less tax and therefore have more cash leftover to retain and reinvest and use to develop and grow and secure your business’ future.(I mention the cuts could be a bad thing for some.  Well this potential exists for those business in the second category above, those that pay tax in their companies then take the money themselves and effectively pay the top up tax over a future period of time.  The tax cuts mean they will have more money to spend now, but more tax to pay later.  And if they aren’t vigilant with their budgeting and saving, it actually will just create a big hole they need to climb out of in the years to come!)

Impact of the company tax cuts on employees and non-business owners

Whenever there is talk of tax cuts, there is a lot of public commentary about the Government of the day (usually the Libs) helping out their rich mates and given money to the wealthy and taking it from the less well off. I’m not going to discuss the whole politics of it all, nor the (purported) back room, country clubs deals, but as far as small businesses and their employees are concerned, the tax cut certainly “can” help.Put simply, if the business loses less of its cash in the tax expense (remember for a business tax is just another expense, like all the others) then it has more cash left over to spend on other business items, including of course pay rises for existing staff, more staff, more training, equipment upgrades, marketing and sales, whatever (oh and yes, of course, potentially profit distributions to the owners).So I’m not saying every business that now pays a little less tax is going to put that in the hands of its employees, but some will!See the Federal Treasurer’s Press Release for some restrained gloating on the issue 🙂