Business, Hot Topic, Tax

Federal Budget 2016 – Proposed Changes to Business Taxation

hand holding stack of cashThere are several proposals for businesses that have been announced as part of the Government’s Ten Year Enterprise Tax Plan. In this article we focus on the increase to the small business threshold, the reduction of company tax rates and the increase to the small business tax discount.

1.  Increase in the Small Business Threshold

The small business entity turnover threshold will increase from $2 million to $10 million from 1 July 2016, as part of the Government’s Ten Year Enterprise Tax Plan.

The current legislation states that businesses with an aggregated annual turnover of less than $2 million are entitled to access small business tax concessions such as PAYG instalment calculation methods, trading stock rules and simplified depreciation rules.

It is expected that the small business tax concessions with be available to businesses with an aggregated annual turnover of less than $10 million, from 1 July 2016. These tax concessions include:

  • Simplified depreciation rules – this includes the immediate write-off of depreciating assets that cost less than $20,000, which is the current threshold until 30 June 2017, and the pooling of most other depreciating assets in the general small business pool (30% diminishing value rate and 15% for additions).
  • Simplified trading stock rules – rather than conducting a stocktake where a reasonable estimation exists that the movement of stock is less than $5,000, taxpayers will be allowed to estimate the value of their trading stock on hand at year end.
  • Immediate deduction for prepaid expenses where the prepayment covers a 12 month period or less, and ends in the next income year.
  • A simplified PAYG instalment calculation method using the GDP adjusted option.
  • As calculated by the ATO, accounting for GST on a cash basis and paying GST instalments.
  • Exemption from FBT, where work related devices, such as mobile phones, tablets and laptops are provided to employees.

For the purposes of accessing small business capital gains tax concessions, the Government has indicated the current $2 million turnover threshold will be retained. Access to the unincorporated small business tax discount will be limited to entities with a turnover of less than $5 million.

2.  Reduction in Company Tax Rates

Small businesses, including those with an aggregated annual turnover of less than $2 million, currently pay tax at the rate of 28.5%. From 1 July 2016, the company tax rate will reduce to 25% over a ten year period. The company tax rate will be based on the aggregated annual turnover and the ability to meet the small business criteria. The proposed company tax rate reductions are shown in the following table:

Financial Year Turnover Threshold Company Tax Rate
2015-16 $2 million 28.5%
2016-17 $10 million 27.5%
2017-18 $25 million 27.5%
2018-19 $50 million 27.5%
2019-20 $100 million 27.5%
2020-21 $250 million 27.5%
2021-22 $500 million 27.5%
2022-23 $1 billion 27.5%
2023-24 all companies 27.5%
2024-25 all companies 27.0%
2025-26 all companies 26.0%
2026-27 all companies 25.0%

For the financial years prior to 2023, entities that do not meet the applicable turnover thresholds will remain subject to a 30% tax rate.

3.  Increase to the Small Business Tax Discount

From 1 July 2016, the tax discount for unincorporated small businesses, such as sole traders and partners in a partnership, will increase from 5% to 16% over a ten year period, as shown in the following table:

Financial Year Company Tax Rate
2016-17 to 2023-24 8%
2024-25 10%
2025-26 13%
2026-27 16%

The annual aggregated turnover will also increase for businesses with income of less than $2 million to businesses with income of less than $5 million. This means that more sole traders and individuals in business partnerships can access the tax discount.

The annual tax discount cap of $1,000 per individual will remain in place as the discount rate increases.

For more information on how these proposed changes may affect you, please give us a call.