Tax Relief for Small and Medium Enterprise

Author: Carl Valentine

Small and medium sized businesses received an early Christmas present this month, with news tax cuts have been fast tracked by five years.

The Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018 was passed into law last week and brings forward the timing of two key areas of tax relief for businesses:

• The tax rate for companies that carry on a business and have aggregated turnover of less than $50 million will drop from 27.5% to 26% from 1 July 2020 and will further drop to 25% from 1 July 2021.
• The small business income tax offset (applicable to income derived by individuals from a business with aggregated turnover of less than $5 million and carried on outside a company structure) will increase from 8% to 13% on 1 July 2020 and will further increase to 16% on 1 July 2021. The offset will, however, remain capped at $1,000 which serves as a significant potential limiter on the additional benefit from this change in rate.

With almost 13-thousand businesses registered across the Townsville region, there are many operators who will be on the receiving end of this potential tax relief.

The reduced rate of corporate tax to 25% from 1 July 2021 will increase the level of after-tax profits that are available to be retained and reinvested by the shareholders of companies. It would also represent an increased pool of after-tax profits available for distribution to shareholders.

For example, a Townsville based engineering company which makes a taxable profit of $100,000 will have an additional $1,500 in 2020-21, increasing to $2,500 in 2021-22 relative to their current position paying tax at 27.5%.

A North Queensland focussed civil contractor which makes a $500,000 taxable profit will have an additional $7,500 in 2020-21, increasing to $12,500 in 2021-2022 relative to their current position paying tax at 27.5%.

The increase in the small business income tax offset to 16% of tax payable on eligible small business income (albeit remaining capped at a maximum tax offset of $1,000), means that individuals receiving business income from unincorporated structures (like sole traders, partnerships and trusts) may pay less tax on that income. This is a direct benefit to many individuals that own small businesses or otherwise share in the profits of small businesses.

At the current 8% tax offset rate, the maximum benefit of $1,000 is reached where an individual would otherwise pay tax of $12,500 or more on eligible small business income. At the future 16% tax offset rate, that maximum benefit will be reached where an individual would otherwise pay tax of only $6,250 on eligible small business income.

The continuation of the $1,000 cap on the small business income tax offset does potentially limit the significance of the increase in the rate of the offset to 16%. Individuals that already pay more than $12,500 of tax on eligible small business income will receive no additional benefit with these changes. With the 16% offset in place, individuals currently paying less than $12,500 of tax on such income will receive an additional benefit, however the maximum potential benefit of $1,000 will be reached once the tax payable reaches $6,250.

Ultimately bringing forward this small and medium business tax relief means business owners will be able to keep more of their own hard earned money, invest more money back into their business and potentially create more jobs, boosting their productivity and growth capacity. It will also help those smaller and medium businesses remain competitive in an increasingly competitive global economy.  

With Townsville’s unemployment rate well above the state average at 9.1 per cent, the impact of the tax relief on business confidence in North Queensland shouldn’t be under estimated. Of course, it is only those businesses making profits and paying tax that will benefit from these changes and more profitable businesses will no doubt argue that the tax relief can’t come soon enough.

Across the nation, it is estimated that up to three million businesses employing around seven million people will benefit from the fast-tracked reform.

The tax cuts will cost the Federal Government around $3.2 billion, paid for by the money it won’t now be spending on tax cuts for bigger businesses - that policy being abandoned after the legislation was knocked back by the Senate earlier this year.

The Federal Opposition has committed to supporting the Coalition’s new tax legislation but has flagged it would pay for the tax cuts by delaying the introduction of its proposed Australian Investment Guarantee by 12 months. That Guarantee would give all Australian businesses the ability to immediately deduct 20 per cent of any new eligible asset worth more than $20,000, with the balance depreciated in line with normal depreciation schedules from the first year.

The bi-partisan approach to these legislative changes is good news for the North Queensland business community. It means clarity in future small and medium business tax rates and a roadmap for the future regardless of who wins power at the next Federal Election.

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