Did the Federal Budget small business measures go far enough?

Commonly seen as the big winners of the 2016/17 Federal Budget, small and medium sized enterprises (SMEs) were the recipients of a company tax rate cut and the extension of spending incentives, amongst other measures. But were there missed opportunities?

Radical change wasn’t expected

Although it tinkered around the edges of the tax system, the Federal Budget is not to be mistaken for tax reform.

Despite a lack of radical measures, SMEs definitely came out on top and with more businesses joining the SME cohort, more are set to benefit. Some of the measures impacting SMEs include:

Extension of small business entity threshold – blurring the lines between SMEs and large enterprises

The good news for many businesses is the extension of the small business entity threshold from an aggregated turnover of less than AU$2 million to AU$10 million as of 1 July 2016.

The Treasurer estimates this change will make another 90,000 businesses eligible for most of the small business concessions.

Incentivising business spend positive, but deferring adoption may stymie growth

Simplified depreciation rules, including immediate tax deductibility for asset purchases costing less than AU$20,000, are amongst the small business concessions now available to the additional 90,000 businesses. This concession runs until 30 June 2017, but doesn’t come into effect for those entities in the AU$2 million to AU$10 million turnover threshold until 1 July 2016.

This concession is designed to encourage spending and stimulate economic growth. Yet delaying the adoption for newly eligible businesses may have the opposite effect; stymieing growth in the short-term – such businesses deferring orders or purchases until 1 July – and impacting last quarter sales for suppliers.

Also worth noting is that most business are unlikely to vary their tax instalments mid-year and therefore the tax benefit gained won’t be realised until lodgement of their 2017 tax return – most likely at the end of the 2017 calendar year or sometime in 2018

Is a 10 year commitment to reducing the company tax rate realistic?

The change to the small business entity threshold also means the additional 90,000 businesses now qualifying will be eligible for the reduced company tax rate introduced in the 2016/17 Budget.

Again, SMEs will certainly benefit from the 1% cut, down from 28.5% to 27.5%. However, the wider business community would be right to be skeptical about whether they will also eventually reap the benefits of the longer term proposal to reduce the company tax rate for all businesses to 25% by 2026/27.

The proposal is definitely a positive one, but 10 years is prophetic in political and economic terms – who knows which party will be in charge or what state our economy will be in by 2026/27.

Federal Budget

 

Should the CGT concession have been extended to this larger group?

In line with the extension of the small business entity threshold, the Government could also have extended the eligibility for the small business capital gains tax concessions.

Disappointingly, this concession will remain available only to businesses with an annual turnover of less than $2m or to taxpayers that satisfy the AU$6 million maximum net asset value test. Given this asset value test was introduced in 1999, it would have been prudent for the Government to revisit this threshold.

Revamp of Division 7A – watch this space

’Targeted’ amendments to Division 7A of the Income Tax Assessment Act are being proposed following a review process conducted by the Board of Taxation. Given they are commencing from 1 July 2018, we are a long way off working out any detail on the changes which aim to ‘improve the operation and administration of Division 7A’ and ‘provide clearer rules for taxpayers and assist in easing their compliance burden’.

Changes include a self-correction mechanism for inadvertent breaches, although given there is already a provision for dealing with honest mistakes this perhaps suggests a possible move to relax the conditions around self-correction. Another change refers to the inclusion of ‘appropriate safe-harbour rules’ – we await further disclosure around what this entails.

Other proposed measures to keep an eye on:

  • Detail around a number of tax consolidation changes which were announced in the budget
  • New ‘whistle-blower’ protection for people including employees, former employees and advisors who come forward to provide information to the ATO on what is rather broadly described as ‘tax avoidance behaviour and other tax issues’ and ‘tax misconduct’ effective from 1 July 2018
  • The introduction of regulatory reform bills to reduce the compliance burden

This is without doubt a pre-election Budget focusing on benefits for small business and growth, while also targeting multinationals and high wealth groups that are not complying with Australian tax laws.

For more insight into the implications of the Budget announcement, download a copy of our Deloitte Federal Budget Report 2016.