The Government has introduced a number of significant new concessions in the Budget to ease the tax burden on small Australian businesses. These include a lowering of the corporate tax rate to an increasing number of businesses over the next 10 years, an expansion of what constitutes a "small business” for certain purposes and an extension to various start-up concessions introduced as part of the 2015-16 budget.
Reduction in the corporate tax rate
The Government has announced its intention to reduce the company tax rate to 25% over next 10 years. This will be undertaken by way of an initial reduction in the tax rate for businesses with an annual aggregated turnover of less than $10 million to 27.5% with effect from 1 July 2016. The turnover threshold will then be progressively increased over time until all companies are taxed at a rate of 27.5% in the 2023-24 income year.
In the 2024-25 income year, the company tax rate will be reduced to 27%. A progressive reduction will then be undertaken by 1% per year until the rate reaches 25% in the 2026-27 income year.
Increase in the Small Business Entity Turnover
The Government will increase the small business entity turnover threshold from $2 million to $10 million from 1 July 2016. The current threshold will be retained for access to the small business capital gains tax concessions, and access to the unincorporated small business tax discount will be limited to entities with turnover less than $5 million. It is anticipated that this will result in an additional 90,000 to 100,000 business entities gaining access to the small business concessions in Australia.
We anticipate that the Government will seek to introduce integrity measures to ensure that businesses are not artificially fragmented in order to fall below the threshold. It will be important to keep this in mind as the measure is introduced.
Unincorporated Small Business Tax Discount
The Government will increase the tax discount for unincorporated small businesses incrementally over 10 years from 5% to 16%. The tax discount will initially be increased to 8% on 1 July 2016. Access to the discount will also be extended to individual taxpayers with business income from unincorporated businesses that have an aggregated annual turnover of less than $5 million.
This change is proposed to coincide with staggered cuts in the corporate tax rate to 25%, as noted above. The current cap of $1,000 per individual for each income year will be retained as part of the measure.
Immediate write-off for assets up to $20,000
The immediate tax deduction for asset purchases up to $20,000 that was introduced in the 2015-16 Budget will be retained until 30 June 2017.
Simplifying rules relating to trading stock, PAYG and GST on a cash basis
As a part of easing the tax burden on small businesses, the Assistant Treasurer has announced that the Government will introduce:
- simplified trading stock rules to give businesses the option to avoid year end stock take where the value of stock has changed by less than $5,000.
- a simplified method of paying PAYG instalments to help avoid the risk of over or under estimating; and
- an option to account for GST on a cash basis and use ATO generated instalments.
Improving the operation of Division 7A
The Government will make targeted amendments to improve the operation and administration of Division 7A of the Income Tax Assessment Act 1936. This is an integrity rule for closely held groups.
The Government has announced that its changes will provide clearer rules for taxpayers and assist in easing their compliance burden while maintaining the overall integrity and policy intent of Division 7A. The key changes will relate to the introduction of a self-correction mechanism for inadvertent breaches of Division 7A, implementation of safe-harbour rules, revised rules for simplified loan arrangements and a number of technical adjustments to improve the operation of the Division. These changes draw on a number of recommendations from the Board of Taxation’s Post-implementation Review into Division 7A and are expected to apply from 1 July 2018.
Start-ups and ESVCLPs
As a part of the Government’s plan to foster start-ups via the National Innovation and Science Agenda, and following on from reforms announced on 7 December 2015, tax incentives for early-stage investors (i.e. “angel investors”) and early stage venture capital limited partnerships have been expanded. Further detail about these reforms can be found here.