The following changes affecting small businesses have passed parliament and are effective from 1 July 2016.
- The company tax rate will be progressively reduced to 25% over 10 years for companies with income below $50m. Starting from 1 July 2016, the company tax rate for businesses with annual turnover of less than $10m will be reduced to 27.5%.
- The small business entity turnover threshold will be increased from $2m to $10m from 1 July 2016 for the purposes of accessing certain existing income tax concessions. These concessions are:
a lower small business corporate tax rate (which will be reduced to 27.5% from the 2016/17 income year)
simplified depreciation rules including the instant asset write off threshold of $20,000 available until 30 June 2019
simplified trading stock rules
capital gains tax for genuine business restructures (ie from a partnership to a company)
an option to account for GST on a cash basis and pay GST instalments as calculated by the ATO
a simplified method of paying PAYG instalments calculated by the ATO, and
other tax concessions such as the extension of the FBT exemption for work-related portable electronic devices available from 1 April 2016 and the immediate deduction of professional expenses.
- The increased threshold will not apply for the purposes of accessing existing small business capital gains tax concessions.
- The small business tax discount for non-companies will increase from 1 July 2016 from 5% to 8%. The offset will also continue to increase in phases over 10 years to 16%. The existing cap of $1,000 per individual for each income year will be retained. From 1 July 2016, access to the discount will be extended to individual taxpayers with business income from an unincorporated business that has annual turnover of less than $5m, an increase from the current threshold of $2m.
The ATO has recently released administrative treatment that clarifies which companies are eligible for the lower tax rate. According to the ATO, a company is considered to be carrying on a business if it was incorporated and operated with an intention to make a profit. Therefore, your company may be eligible for lower tax rates in the 2015/16 and 2016/17 tax years. However, from 1 July 2017 the lower company tax rate will only apply to base rate entities.
Having different tax rates depending on the size and type of activity of a company is bad policy. It simply adds to complexity and has created additional legislation and administration processes to determine eligibility for a lower rate. Adopting the lower rate and the administrative work associated is not optional however, in the context of many small businesses reducing the tax rate and also the dividend franking rate provides a marginal benefit at best given that most companies in the sector operate on a flow-through basis with capital assets held in separate entities for asset protection. You will note that the passing of this law is retrospective meaning there have been three tax years where taxpayers had to make a guess as to whether their company qualified for the lower rate and potentially go the trouble and expense of amending if they got it wrong. Small business are crying out for a simple tax system and all they get is this rubbish.