14 Jul 2015

Small Business Tax Concession

As announced in the May 2015 Federal Budget

Small Business Tax Concessions announced in the May 2015 Federal Budget:

(Small business refers to businesses with turnover (sales) less than $2Mil per annum). The most significant changes are as follows:

·         An immediate write off for each asset costing less than $20,000. This measure is effective from 12 May 2015 and will be in force until 30 June 2017.

What this means is that an asset purchased any time during the financial year, costing less than $20,000 can be claimed as a tax deduction in full, in the year of acquisition. The deduction reduces the businesses taxable income by that amount.

For example, if in a normal year sales total $60,000 and expenses total $10,000, then the taxable income of the business is $50,000. If an asset (say a car) is purchased for $19,000 and is 100% for business use, then taxable income is reduced to $31,000.

The amount of tax saved depends on the type of business structure being used to run the business.

The deduction applies to each individual asset acquired that costs less than $20,000.

Assets costing $20,000 or more are deducted in a general depreciation pool whereby a deduction of 15% of the purchase price (assuming the asset is 100% for business use) is claimed in the year of acquisition and the balance claimed at 30% of the remaining balance each year thereafter.

For example, an asset with 100% business use, costing $30,000 is deducted as follows:

a.       Year 1 (Year of acquisition) claim 15% = $4,500, balance carried forward to year 2 is $25,500.

b.      Year 2 claim 30% of $25,500 = $7,650, balance carried forward to year 3 is $17,850.

c.       Year 3 claim 30% of $17,850 = $5,355, balance carried     forward to year 4 is $12,495.

d.      Year 4 claim 30% of $12,495 = $3,749, balance carried forward to year 5 is $8,746.

e.       Year 5 claim 30% of $8,746 = $2,624, balance carried forward to year 6 is $6,122.

If, at any time during the period 12 May 2015 to 30 June 2017, the balance of the general depreciation pool falls below $20,000, the whole of the balance can be written off even if the pool includes assets before 12 May 2015.

·         For corporate small businesses the company tax rate will be reduced from 30% to 28.5%, effective from 1 July 2015.

For example, a company has a taxable income of $100,000. Tax payable will now be $28,500 (28.5%) from 1 July 2015 compared to $30,000 (30%) before 1 July 2015.

The impact on the franking account is still to be clarified. Some suggestions are that the balance at 30 June 2015 will not need to be adjusted for the new tax rate and future franking account balances will accumulate based on 28.5%. Shareholders will still receive franking credits at 30%, meaning the amount available for distribution will be exhausted sooner.

·         For non-corporate businesses, ie sole traders, partnerships and beneficiaries of trading trusts, there will be a 5% discount on the amount of tax payable up to a maximum of $1,000.

For example, a sole trader has taxable income from business of $50,000.  Total tax payable excluding the medicare levy and low income tax offset, is $7,797. The 5% discount will be $389.85, bringing the total tax payable down to $7,407.15.

The maximum discount amount of $1,000 will mean that a tax bill from business earnings of $20,000 will receive the maximum discount of $1,000. Therefore if a taxpayer only receives business income and if the taxable business income is $86,630, tax will be $20,000 and the discount will be $1,000. Business taxable income over $86,630 will still receive $1,000 discount but no more.

The discount applies to business income only so if a taxpayer has business income and employment income subject to PAYG withholding the discount only applies to the business income.

·         Start up costs, usually written off over 5 years will now be able to be claimed immediately. This is effective from 1 July 2015.