nudge blog: Friday FinanceHaving experienced significant political backlash after the release of the 2014 Federal budget, the government has come out fighting this year. The release of the 2015 budget in May was designed to increase public and private sector approval whilst reeling in the current deficit and stimulating the economy to control the unemployment rate. One of the outcomes of this challenge has been the prominence of small business support.

What follows is an overview of the amendments made to the small business assistance package and recommendations about how businesses can best capitalise on the 2015 tax breaks.

What is classified as a small business?

If you’re a business owner in Australia, it’s likely you’re a small business owner. SMEs account for 96% of Australian businesses, making them greatly influential to the state of the domestic economy. A small business is one whose aggregate annual turnover is less than $2million. The government estimates that this encompasses approximately two million Australian businesses.

2015 Budget amendments relevant to small businesses

  1. Small business tax cut

Currently the small business tax rate is set at 30%, however, from 1 July 2015 this rate will be reduced to 28.5%. In conjunction with the tax cut, a franking credit of 30% will remain for shareholders.

If you are an unincorporated small business, how does this benefit you? The budget details a 5% discount on the tax payable on small business owners’ profits up to a maximum of $1,000 per individual. The rewards of this discount will be reaped through owners’ year-end tax return in the form of a tax offset.

  1. Return of the instant tax deduction for asset purchases

Past budgets have implemented an instant tax deduction for asset purchases capped at $6,500 to help stimulate small business spending. This has been reintroduced, this time with a surprising $20,000 cap. Any approved purchases made before the end of June 2017 will qualify for this reintroduced policy.

This budget feature stands as a highly attractive amendment for small businesses. This can also be the source of a few risks which should also be considered prior to any rash decisions. The following should be closely noted:

  • The tax break is only applicable to purchases under $20,000
  • This policy has been implemented immediately. This means that if companies act now and make relevant purchases prior to the adjustment of the small business tax rate (30 June 2015), the current small business tax rate of 30% applies as opposed to the reduced rate of 28.5% which is soon to be implemented.
  • Do not ignore extra costs that apply to your purchase such as instillation. If added costs bump your purchase over the $20,000 limit then the tax break no longer applies.
  • Consider the relevance of this tax break to your business prior to committing to it. Your small business may not necessarily be placed to benefit from this budget amendment. For example, if your business is not posting profits then this is not useful to you – this is a tax break policy, not simply free money. It’s recommended that prior to any major decisions, a conversation with your accountant should take place.
  • Do not attempt to ‘cheat the system’. Quickly after announcing this tax break the government explained their strong stance on scrutinising businesses to catch those abusing the system. A faulty claim is not worth the pain.
  • It may sound like an obvious point, but this budget feature is only applicable to small businesses. Do not assume that you qualify for these benefits simply by being a tax paying citizen.

 

  1. Start-up cost reductions

In an attempt to further encourage growth and spending, the government has included benefits to those venturing into a start-up business. Previously, costs associated with a business start-up were only to be deducted over a five year period – this is soon to change. As of 1 July 2015, associated costs can be fully and immediately deducted.

 

Additional Amendments

The amendments made to the small business package are not the sole source of business benefits that the 2015 budget offers. Additional budget features will likely impact you personally, your employees, your business, or a combination of the three.

Car expense deductions

Certain methods currently used to calculate car expense deductions will shortly become obsolete; specifically, the ‘12% of original value’ method and the ‘one third of actual expenses’ method.

As of now most use the ‘cents per kilometre’ method to calculate their car expense deductions. This system calculated deductions based on engine size. This is soon to change. As of 1 July 2015, a rate of 66 cents per kilometre will be applied across the board regardless of engine size.

Foreign temporary worker tax rates

As of now, those who have been in Australia for at least six months have the opportunity to claim the tax free threshold and the lower tax rate of 19% for income earned exceeding the tax free threshold but still less than $37,000. This is the same as what Australian citizens are eligible for.

From the 1 July 2016, these tax rulings will change for foreign temporary workers. The new policy states that non-citizens will be taxed 32.5% of their income irrespective of the amount of time they have been in the country.

Foreign temporary workers do comprise a notable percentage of workers in certain sectors such as hospitality and agriculture. Such an adjustment is likely to have an impact on these industries, and should be noted by those to which the adjustment applies to.