Federal Budget - “dull and boring” ? Not for small business!
Small business is a clear winner from the 2015-16 Federal Budget delivered by the Treasurer, Mr Joe Hockey last night.
From a taxation point of view, the Budget contained some significant changes, although "big ticket" tax reform measures remain for consideration in the Tax Reform White Paper, policy proposals from which will be released in 2016 to take to the next election.
Key Highlights from the budget include;
Small Business (i.e. those with aggregated annual turnover <2M in current or previous financial year)
Company tax rate down to 28.5%
A reduction in the company tax rate from 30% to 28.5%. Importantly the current maximum 30% franking credit will still be available to those companies’ shareholders. This should allay fears that the tax cut would merely have resulted in “mum and dad” shareholders of family companies paying the extra 1.5% in top-up tax. This will apply from 1 July 2015, therefore company PAYG Instalments can benefit from this in their September 2015 BAS!
5% Tax Discount on Income from Unincorporated Small Business
Only around 30% of small businesses are incorporated (i.e. around 70% are sole traders, trusts and partnerships), so the reduced 28.5% rate will have limited effect. To balance the equation, from 1 July 2015, individual taxpayers will receive a 5% discount (in the form of a tax offset) on the business income they receive from an unincorporated Small Business (capped at $1,000 p.a per individual). Whilst the detail on this has not been announced, presumably this will operate similarly to the “Entrepreneurs Tax Offset” from a few years ago, in that an individual receiving a distribution from a family trust for example will receive a 5% discount on the tax payable on that income (effectively capped at up to $20,000 of income per person). It would then follow that the greater number of beneficiaries, the greater the tax savings.
Immediate Write-Off Deduction for assets costing less than $20,000 – Effective Immediately! Spend Now to Save $$$ in the 2014/2015 Tax Return!!!!
This is a huge win for small business, increasing the threshold from the current immediate deduction for assets costing < $1000 to $20,000. This is effective immediately, until 30 June 2017. As businesses are thinking about tax planning for the current year, this incentive to invest in business plant and equipment today!
Immediate Deduction for Start Up Costs
An immediate deduction will be available for a range of professional costs associated with starting a new business. Currently some of these costs are deducted over a 5 year period. This includes legal fees associated with establishing a company or trust. Available from 1 July 2015.
CGT Relief for Changes to Entity Structure
Currently CGT Roll-over relief is available for individuals who incorporate and beneficially own shares in the new company (which is rather a pointless exercise). This budget measure is proposed to give further CGT relief when changing the business structure to other forms, the government gives the example of a sole trader changing their business to a trust. This is proposed to take effect for changes occurring from 1 July 2016. Until this measure is finalised, sole traders and partnerships looking to change their structure should weigh up the tax savings and asset protection benefits which can be obtained within the next 12 months, versus the capital gains tax which may be saved if they wait until 1 July 2016. Importantly, all proposed budget measures will need to pass through the Senate before they become certain.
This measure however does not make mention of any further relief to be available in the form of capital gains tax resulting on the transfer of company shares, for example where clients have received poor advice in the past and the company has “Mum and Dad” as shareholders, and they wish to transfer these shares to a family trust. However, using the current small business concessions, these re-structures can often still be done tax effectively, sometimes even converting non-tax deductible debt to tax deductible debt in the process. Any new clients in this situation should arrange a free one-hour initial consultation to investigate the options further and harness the considerable asset protection and tax advantages to be obtained by including a family trust within their structure.
No FBT on Work-Related Electronic Devices
Portable electronic devices provided to employees will be exempt from FBT tax, provided they are used primarily for work. Currently the FBT exemption is limited to only one device per person per year where the devices perform substantially similar functions, this has caused confusion when it comes to items such as a tablet and laptop. This takes effect from 1 April 2016.
Work Related Car Expenses Simplified
The current 12% of original cost and 1/3 of expenses methods (rarely used) will be abolished. The logbook and cents per kilometre method will remain, however the cents per kilometre deduction will become a flat rate deduction of 66cents per kilometre regardless of engine capacity (down from current rates of 65c, 76c and 77c). These changes will be effective from 1 July 2015 (i.e. 2015/2016 Income Tax Return).
Zone Tax Offset to exclude “Fly-In Fly-Out” and “Drive-In Drive Out” workers
These workers will no longer be able to claim this offset where their normal residence is not within a “zone”. The ZTO is available to individuals in recognition of the isolation, uncongenial climate and high cost of living associated with living in identified locations. Currently, to be eligible for the ZTO, a taxpayer must reside or work in a specified remote area for more than 183 days in an income year. It is estimated that around 20% of all claimants do not actually live full-time in the zone. This measure will take effect from 1 July 2015.
New Child Care Subsidy
This will replace the current child care benefit and child care rebate, from 1 July 2017. Families meeting the activity test with annual incomes up to $65,710 will be eligible for a subsidy of 85% of the actual fee paid, up to an hourly fee cap. The subsidy will taper to 50% for eligible families with annual incomes of $170,710. The CCS will have no annual cap for families with annual incomes below $185,710. For families with annual incomes of $185,710 and above, the CCS will be capped at $10,000 per child per year.
From 1 July 2016 individuals will no longer be able to “double dip” by taking payments from both their employer and the government. The government will ensure all primary carers have access to parental leave at least equal to the maximum PLP benefit (currently 18 weeks at the national minimum wage).
The assets test threshold (‘assets free area’) will be increased. For single home owners from $202,000 to $250,000, and for couple home owners from $286,000 to $375,000. Pensioners who do not own their own home will also see an increase in their asset test threshold to $450,000 for singles and $575,000 for couples.
However the government will reduce the maximum value of assets that can be held to qualify for a part pension. Under the proposed changes, this threshold will decrease to $823,000 plus the family home. Also, the current ‘taper rate’ at which the age pension begins to phase out will be increased from $1.50 to $3 for every $1,000 of assets over the relevant assets test threshold. Pensioners who lose pension entitlements on 1 January 2017 as a result of these changes will automatically be issued with a health care card.
“Netflix” tax to impose GST on digital products and services such as software, imported by consumers in Australia. This is to address the current disadvantage on domestic businesses that supply such goods compared to overseas businesses.
Employees of Public Benevolent Institutions and Health promotion charities can currently salary sacrifice meal entertainment benefits with no FBT payable and without it being reported as a Reportable Fringe Benefit for income testing Purposes. From 1 April 2016 these will now be subject to a grossed up cap of $5000, and all benefits will be reportable.
Access to Super for Terminally Ill
Relaxed criteria to apply to individuals with a terminal medical condition to be able to access their preserved superannuation benefits.
Word of Caution - It is noted that several major new spending measures are linked to savings attached to legislation that is currently stalled in the Senate. Getting Budget measures through the Senate will be no easier than last year, although the composition of the Senate has changed since then, with more independents and the Palmer United Party down to one Senator.