Federal Budget 2015/16: General concessions for small business

24 Jun 2015

By Shadforth Financial Group

The 2015/16 Budget has introduced a number of generous concessions for small businesses, with tax relief being the single most significant business benefit item in this Budget. The specific concessions relevant to each business category are discussed.

Small businesses acquiring depreciating assets

This concession will allow businesses with aggregate turnover under $2 million to claim immediate deductions for assets they acquire and install ready for use between 12 May 2015 and 30 June 2017, where the cost of each asset is less than $20,000.

The concession will extend to the majority of capital asset types, excluding only a small number of non-eligible assets such as horticultural plants and in-house software.

This concession is probably the most generous of all, particularly taking into account that there is no limit on the number of assets acquired, and is intended to boost small business activity and investment. The Treasurer has made it clear that no cap is intended and the Government will have achieved its purpose if small businesses exceed expectations.

Small companies 

The tax rate for small companies with aggregated annual turnover of less than $2 million will be subject to a reduction of 1.5% to 28.5%. The maximum franking credit rate for a distribution, however, will remain unchanged at 30% for all companies.

The net effect is that the company will benefit from the tax reduction in a cash sense, at least for so long as it does not distribute the cash saving to shareholders.

It is unclear from the Budget papers, however, whether once the dividends are paid, the extra 1.5% tax will be effectively passed-on to the shareholder. This is because under current law the maximum franking credit for a frankable distribution is equivalent to the maximum amount of income tax that the entity making the distribution could have paid at the current corporate tax rate on the profits underlying the distribution.

In the absence of any additional modifications to the existing legislative provisions, the fact that a franking balance has been generated by credits to a franking account in prior years at 30% does not allow a company with a current tax rate of 28.5% to frank at 30%. These uncertainties regarding franking account administration will hopefully be resolved before the introduction of the new legislation.

Unincorporated small business activity

Small businesses which operate as sole traders, partnerships or trusts with annual turnover of less than $2 million will be eligible for a 5% discount over the next four years. Unlike the situation with the small companies described above, there are no additional complications with franking credits which would result in the tax unpaid by the business structure being passed-on to the owner or shareholder.

Start-ups

From the 2015-16 income year, an immediate deduction will be available for expenses on professional services associated with starting a new business, including professional, legal and accounting advice. Currently and subject to conditions, businesses are able to deduct such expenses over a five-year period under the 'black hole expense' provisions.

The goal of the new concession is to provide additional cash flow to new businesses. By being able to deduct the expense, tax savings will result.

Small businesses intending to restructure

From the 2016-17 income year, it will be possible to restructure a small business with turnover of less than $2 million without attracting capital gains tax (CGT) liability. That is, when the previously-existing business structure disposes of all of its assets to the newly-created structure, the CGT consequences of such disposal will be ignored.

The intention behind this measure is to provide more freedom for small businesses to change their initial structure if it becomes apparent once the business is more established that a different structure is required.

Small businesses which provide portable electronic devices to employees 

From 1 April 2016, a Fringe Benefits Tax (FBT) exemption will be available in respect of more than one qualifying work-related portable electronic device, even where the devices perform substantially similar functions, for example, a tablet and a laptop. Currently, an FBT exemption can only apply to one device where there is an overlap in function between devices.

Which definition of 'turnover'?

A number of the concessions described above rely on the annual turnover of the business being below $2 million. It is not clear from the Budget papers, however, whether for the purposes of the new concessions, the existing definition of 'annual turnover' in the legislation is going to be used. If it is, small companies which derive only investment income may not be eligible, since the existing definition required the company to 'carry on a business'.

The uncertainties surrounding the application of the concessions will hopefully be clarified and resolved before the relevant legislation is passed. If you believe your business may be eligible for any of the above concessions, contact your Shadforth team who will be able to assist.

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