In the Federal Budget, small businesses with a turnover of less than $10 million are the big winners, benefiting from measures which are designed to stimulate growth and investment.
At a time when the Federal Government is looking at tax reform, it was announced the company tax rate will drop to 27.5 percent for all companies with an annual turnover of less $10 million from July 1, 2016. Currently, for incorporated small businesses with turn over less than $2 million, the corporate tax rate is 28.5 percent. Lowering the small business corporate tax rate to 27.5 percent, coupled with an increase in the threshold to $10 million, will deliver cash- flow bene fits. This is particularly relevant for South Australia where the manufacturing and mining sector pullback has seen a strong increase in small business growth, with many people transitioning from large, multinational businesses to small businesses. In fact, more than 90 percent of South Australian small businesses come under the new threshold, so this Budget should have a signi ficant impact on our local economy. Beyond the reduction in the corporate tax rate, lifting the threshold to $10 million from July 1, 2016, also has an impact on businesses claiming an immediate tax deduction for depreciable asset purchases costing up to $20,000 until June 30, 2017. This will encourage businesses to increase their level of capital expenditure. Other bene fits include simpli fied trading stock rules; access to an easier method of paying Pay As You Go (PAYG) instalments calculated by the Australian Taxation O ffice; the option to account for Good and Services Tax (GST) on a cash basis; and other tax concessions currently available to small businesses with a turnover of less than $2 million. Another positive in this Budget is that individual taxpayers have not been targeted with tax increases, and middle-income earners have been given some modest tax relief designed to address ‘bracket creep’, with the threshold in the second-highest marginal tax bracket being lifted from $80,000 to $87,000. However, this will only provide temporary relief, as PwC research shows that in just five years’ time, bracket creep – inflation moving incomes into higher marginal tax brackets – will cost Australian taxpayers $45 billion through higher income taxes if there are no other changes to the tax system. If the Government wants to take meaningful action on bracket creep, it must deal with the underlying cause of the problem and index income tax thresholds to either in flation or average wages. Beyond Budget changes targeting small business and bracket creep, the measures attracting the most attention are the changes to superannuation, which will impact low-income earners (with incentives to bolster their super savings) as well as high-income earners through a raft of changes. For instance, from July 1, 2017, concessional contributions (i.e. contributions which come from pre-tax income) will be reduced from $30,000 to $25,000 per annum. While this measure reduces the ability of people to grow retirement savings, those who have superannuation balances less than $500,000 will be able to carry forward ‘unused cap amounts’ to allow a catch up in contributions. Given the extensive nature of the proposed changes to superannuation, it’s a good idea to seek independent and objective financial advice on how the various changes might impact your retirement savings. In particular, one industry that could take a hit is the self-managed superannuation industry, which has grown signi ficantly over the past 15 years as more and more people opt for direct control over their retirement savings. However, recent changes that limit the amount of funds that can be contributed to superannuation and the introduction of other integrity measures aimed at borrowing arrangements by self-managed funds, might lead high-income earners to question the continued relevance of these vehicles. South Australia is a fascinating place to do business, particularly in the current environment. There is a lot of change happening, which brings with it opportunity, and there are plenty of good news stories out there where businesses are re-loading, investing and getting on with it. On the whole, the Budget is positive for South Australia as it opens up tax concessions to more of our small businesses, which, coupled with other Federal and State initiatives, will provide a platform for more businesses to have a go, invest and deliver jobs. James Blackburn, Partner, PwC pwc.com.au