Now that the dust has settled on the 2015 Federal Budget announcement, we have reviewed the release notes in detail to assist you in understanding how the more significant proposed measures practically impact on you and your small business.

Please note that references below to small businesses are those businesses with annual sales turnover of less than $2 million.

Cut in small business company tax rate from 30% to 28.5%

With effect from 1 July 2015, there will be a 1.5% cut in the company income tax rate applying to small businesses from 30% to 28.5%. Companies with annual turnover of $2 million or above will continue to be subject to the current 30% rate on all of their taxable income.

Example

An incorporated business has annual turnover of $1.3 million and taxable income of $200,000. Under the current law, the business would pay income tax of $60,000 (i.e. 30%) whereas under the proposed law the business would pay income tax of $57,000 (i.e. 28.5%), a $3,000 saving.

Small business tax discount

The above 1.5% tax cut relates to small businesses that utilise a company structure. However, small businesses that use a structure other than a company (e.g. sole trader, partnership, or trust) will instead be eligible for the small business tax discount, with effect from 1 July 2015. The small business tax discount will be 5% of the income tax payable on the business income received and be delivered in the form of a tax offset, but will be capped at $1,000 per individual.

Example

A person running a business as a sole trader has annual turnover of $300,000 and taxable income of $75,000. Under the current law, the person would pay income tax of approximately $16,000. Under the proposed law, the person will be entitled to a tax offset of $800 (i.e. $16,000 x 5%) and therefore only pay $15,200 in income tax.

Small business asset write-off

Assets that are acquired and installed ready for use by small businesses between 7:30pm AEST on 12 May 2015 and 30 June 2017 are able to be immediately written off provided the cost of the asset is less than $20,000. This threshold applies on a per asset basis.

Assets that cost $20,000 or more (which cannot be immediately deducted) can continue to be placed in the small business simplified depreciation pool and depreciated at 15% in the first year and 30% each year thereafter. It should also be noted that where the balance of the small business simplified depreciation pool is less than $20,000 over this period the entire balance can be immediately written off (including existing pools).

From 1 July 2017, the threshold is expected to revert back to the existing amount of $1,000.

Example

A bakery that is structured as a company purchases a new oven for $13,750 and a new cabinet for $3,500. Under the previous law, because these assets each exceed the previous $1,000 threshold, they would need to be included in the small business pool. Of their combined $17,250 cost, only 15% (or $2,588) would be depreciated in the first year. At a company tax rate of 30%, the company would receive a tax benefit of $776 in the first year.

Under the new law, the company will be able to claim an immediate deduction for both assets, providing an immediate deduction of $17,250. With the new small business company tax rate of 28.5% from 1 July 2015, the company will receive a tax benefit of $4,916, which is an improvement of $4,140.

Immediate deductibility for professional expenses regarding start-up businesses

With effect from 1 July 2015, businesses will be able to immediately deduct a range of professional fees associated with starting a new business, such as accounting and legal advice. For example, fees paid to your accountant to establish a new company or trust.      

Currently, these professional costs are deducted over a 5 year period.

Example

A person paid $1,500 to their accountant to setup a company for a new business venture. Under the current law, the new company would only be able to claim a deduction of $300 over the next 5 years. However, under the new law, the company would be able to deduct the entire $1,500 in the first year.

CGT rollover relief for change of entity structure

With effect from 1 July 2016, small businesses will be able to change the legal structure of their business without attracting a Capital Gains Tax ("CGT) liability at that point.

CGT rollover relief is currently available for individuals who transfer their business into a company (provided certain criteria are met), but all other entity type changes have the potential to trigger a CGT liability. This measure recognises that new small businesses might choose an initial structure that they later find does not suit them when their business is more established. The Government provided an example of a sole trader changing their business structure to a trust without triggering any CGT liability.

No FBT on work related electronic devices

From 1 April 2016 small businesses will be able to provide their employees with more than one qualifying work related portable electronic device (e.g. mobile phone, laptop, tablet, etc.), even where the devices have substantially similar functions.

Currently, an FBT exemption can apply to more than one portable electronic device used primarily for work purposes provided the devices perform substantially different functions. This new measure is designed to remove confusion where there is a potential overlap in the functionality of various devices. For example, a small business employer can now provide both a laptop and a tablet to its employees under this exemption despite their similar functionality. Note, each device still needs to be primarily used for work purposes in order to be exempt from FBT.

Work related car expenses

Currently, there are 4 different methods by which taxpayers can claim a tax deduction for work related car expenses - cents per kilometre, logbook, 12% of original value, and one-third of actual expenses incurred. From 1 July 2015, only the cents per kilometre and logbook methods will continue to be available.

As a further simplification, the cents per kilometre method will only have a single rate of 66 cents per kilometre, as opposed to the three different rates that currently apply based on the engine capacity of the car.

Additional information

If you would like any additional information regarding the above or any other tax related matter, please don't hesitate to contact our office on (02) 9894 8884 or info@vantagepartners.com.au