Tax and super
Making our tax system more sustainable so we can cover the Government’s responsibilities for the next generation
Boosting growth for all Australians
As we transition from the mining investment boom it is vital that we give businesses every opportunity to invest, innovate, grow and employ more Australians.
We need a tax system that supports enterprise by backing businesses to invest. It must also ensure that Australia continues to be an attractive place to do business. This will secure our future and create jobs for Australians. This will also ensure that we manage the transition to a more diversified economy that continues to expand.
The Government will back small businesses by reducing their tax rate to 27.5 per cent, starting with businesses with a turnover less than $10 million on 1 July this year. This will deliver a lower tax rate for around 870,000 companies who employ over 3.4 million workers.
Over ten years the Government will encourage investment and higher-paid jobs by decreasing the tax rate on all companies to 25 per cent by 2026–27. This will make Australian companies more internationally competitive in a tough global market place.
This means higher living standards for Australians and an expected permanent increase in the size of the economy of just over one per cent in the long term.
Lower taxes and greater access to tax concessions
Small businesses are the engine room of our economy. They are the home of Australian enterprise and opportunity and they are where many big ideas begin. They employ over 3 million workers and in 2013-14 added around $340 billion to our economy.
This is why we will reduce the tax burden on small businesses first.
Since many small businesses are not companies, the Government will extend the unincorporated small business tax discount.
From 2016-17, the discount will be available to businesses with annual turnover of less than $5 million, up from the current threshold of $2 million, and will be increased to 8 per cent. The maximum discount available will remain at $1,000.
Over the next decade, the discount will be further expanded in phases, to a final discount of 16 per cent.
This means that every year around 2.3 million businesses will potentially have access to the unincorporated tax discount.
* for unincorporated businesses with turnover less than $5 million
These changes will benefit over 90,000 businesses.
Further support will be provided for small businesses to expand and create jobs. Access to a number of tax concessions will be provided by increasing the threshold for these concessions to $10 million, up from the current $2 million threshold. These changes will benefit over 90,000 businesses.
From 1 July 2016 all businesses with annual turnover of less than $10 million will have access to:
- simplified depreciation rules, including immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2017
- simplified trading stock rules, giving them the option to avoid end of year stocktake if the value of their stock has changed by less than $5,000;
- a simplified method of paying PAYG instalments calculated by the ATO, which removes the risk of under or over estimating PAYG instalments and the resulting penalties that may be applied;
- the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;
- other tax concessions currently available to small businesses, such as fringe benefits tax (FBT) exemptions (from 1 April 2017 to align with the FBT year); and
- a trial of simpler business activity statements (BAS), reducing GST compliance costs, with a full roll-out from 1 July 2017.
These threshold changes will not affect eligibility for the small business capital gains tax concessions, which will remain available for businesses with annual turnover of less than $2 million or that satisfy the maximum net asset value test.
How this helps small businesses
Edna owns a company, Edna Pty Ltd, through which she operates three cafes across Queensland. Edna Pty Ltd has an aggregated turnover of $3.6 million and a taxable income of $180,000 for the 2016-17 income year.
Half way through the year, Edna purchases three new freezer units at a cost of $4,000 each and three new coffee machines at a cost of $11,000 each, exclusive of GST, for her cafes.
Edna Pty Ltd would not be classified as a small business. Therefore, Edna Pty Ltd must depreciate the coffee machines and freezer units using an effective life of 5 and 10 years respectively. Assuming a diminishing value method of depreciation, Edna Pty Ltd can claim a tax deduction for the freezer units of $1,200 and the coffee machines of $6,600 in the first year.
The depreciation deduction of $7,800 for the asset purchases would reduce the taxable income of Edna Pty Ltd to $172,200 for the 2016-17 income year, giving rise to a tax liability of $51,660 for that year, with a company tax rate of 30 per cent.
Under the new law, Edna Pty Ltd would be classified as a small business and would receive the new small business company tax rate of 27.5 per cent from 1 July 2016.
Edna Pty Ltd would also be able to claim an immediate deduction for each freezer and coffee machine purchased, giving an immediate deduction of $45,000 in the 2016-17 income year. With the new small business company tax rate, Edna Pty Ltd would have a taxable income of $135,000 and tax liability of $37,125 for the 2016-17 income year, after the immediate deductions for the new asset purchases.
Edna Pty Ltd is able to adopt a simplified method of paying PAYG instalments using calculations prepared by the ATO. This removes the risk of under or over estimating PAYG instalments and the resulting penalties that may be applied.
Having access to the small business tax concessions will result in Edna Pty Ltd receiving a cash flow benefit of over $14,000.
In addition, Edna Pty Ltd will have access to a range of other small business tax concessions.
How this helps unincorporated small businesses
Antony is a sole trader that runs a construction business. Antony’s business has an annual turnover of $2.5 million and taxable income of $150,000. This is his only income.
Under the current law Antony pays tax at his marginal tax rates and pays $46,447 in tax (including the Medicare levy).
Under the new laws Antony gains access to the unincorporated tax discount and the increase in the personal income tax threshold from $80,000 to $87,000. Antony will pay $45,132 in tax (including the Medicare levy).
Antony is $1,315 better off under the new laws. The unincorporated discount accounts for $1,000 of this.
In addition, Antony will also have access to a range of other small business tax concessions, including immediate deductibility.
Investment drives growth which leads to higher wages and better living standards
The Government is making changes so that it is easier to invest in Australia and access alternative sources of investment.
More financing sources
Changes to the tax rules from 1 July 2018 will encourage investment by ensuring that asset-backed financing is given the same tax treatment as conventional financing. Asset backed financing is similar to conventional financing but relies on the trading of assets, sharing of profits or leasing to finance an investment, rather than interest repayments. Asset backed financing arrangements can be used to support infrastructure investment as they are well suited to large and long term projects.
This will enable Australian business to more easily access investment, generating growth and job creation.
New investment vehicles
Changes to the tax and regulatory rules will also create two new forms of investment vehicle – a corporate collective investment vehicle (CIV) from 1 July 2017 and a limited partnership collective investment vehicle from 1 July 2018. These vehicles are internationally recognised and easy to use structures that will make managed funds based in Australia a more attractive place for foreigners to invest.
Creating these new structures will encourage foreign investment as well as the export of funds management services from Australia. Australian exports represent less than 4 per cent of funds under management, highlighting a significant potential export growth industry.