2015 Budget: Impact on Business
$20k asset write-off
Spruiked as a win for small business, this incentive gives you an up-front tax deduction for certain business assets. Remember that these assets would have been claimed as a tax deduction over the next few years anyway. So, what is the real effect of this measure? Simply put, it cashes in your tax deduction for the asset in the one hit, instead of over the next few years.
Established businesses with large profits are best placed to take advantage of what is purely a timing difference in tax saving. The hidden danger is that the $20k write-off can actually cost you. If you’re a start-up business you probably don’t need up-front tax deductions, because business profits are usually at their lowest when a business is first starting out. A Business would potentially be better off spreading this tax deduction over the next few years instead of claiming the $20k up-front deduction, thereby benefiting from bigger tax savings in later years when profit is usually higher. And Sole Traders with a steady profit of around $40k, beware… you could be over $2,000 worse off thanks to this new measure!
Tax Rates & Tax Breaks
The Government has revived the call for a reduced company tax rate for small business from 30% to 28.5%, as originally announced in last year’s budget. This measure is grounded in the mythology that job creators are Businesses, whose taxes must be low in order to induce them to create more jobs. A bit like the tail that wags the dog.
Sole-Traders with businesses turning over less than $2m in sales will receive a 5% tax discount of up to $1,000 on their business income. To make full use of the $1,000 tax break, business profit would need to be $86,630 or more.
Trusts turning over less than $2m in sales will also receive the $1,000 tax discount, meaning the first $2,040 of a Trust’s business income will now effectively be tax-free.
Economists agree that the real job creators are the vast majority made up by the middle-class and poor, whose spending induces businesses to create jobs. More disposable income in their hands would stimulate spending, and consequently drive business growth (insert dog-wagging-tail clip here). Ready-made consumers desperate to spend on much needed essentials just to survive, would drive a resurgence in business activity with a boost in demand for goods and services from Businesses. A win-win where nobody gets left behind. However, there has been no mention of a plan to improve minimum wages, nor any meaningful changes to tax rates for individuals. Compounding this increasing disparity is “bracket-creep”, where inflation pushes income into higher tax brackets of 40% or even 50% for individuals.
Immediate Write-Off for business Start-up costs
Another measure which could be more of a hindrance than a help, this incentive can actually leave Sole Traders worse off than you otherwise would have been. As discussed above in relation to the instant $20k asset write-off, start-ups don’t need up-front tax deductions because business profits are usually at their lowest when a business is first starting out.
Take, for example, a Business intending to claim an immediate deduction of $5,000 in start-up costs. If that Business’ profit was already under $20k, it would have just wasted a $5k deduction for $nil tax benefit!
Assuming the Business will grow in profitability in coming years, it would have been better off claiming this expense over the next 5 years instead. Spreading the deduction in this way allows you to claim the tax deduction when you really need it – in years of highest profit.
When broken down and analysed, the incentives outlined in the 2016 Budget will benefit some and disadvantage others. Even so, this Budget is somewhat of a Budget-light. The overall trend however continues to be encouragement for small business to operate through a Company structure. A carefully planned business structure can tick all the appropriate boxes, and you should seek advice from your professional today to ensure your business is best placed to take full advantage of current opportunities. The team at Hansens is here to help you in this regard. We can also talk to you about your business, and turn the numbers into knowledge. So give us a call today.
Read more about Tuesday’s budget announcements here.
Read more about the best structure for your business in my blogs:
Allan is a Tax Specialist with 15 years’ experience helping clients create wealth.