Some journalists are characterising the budget as “the right budget” while others are calling it “confidence boosting” which is primarily true, particularly, if you are a small business owner with an annual revenue under $2,000,000. This budget for small business can be summarised by three things; tax breaks, tax cuts and tax code simplification. That being said, don’t believe the hype some of the media is promoting about this being just what the economy needed, while it is definitely a step in the right direction it is only the first step on the staircase to meaningful improvement. Notable journalist Ross Gittins who is the Sydney Morning Herald’s, Economics Editor summed it up perfectly when characterising the overall impact of this budget. He stated that with a projected improvement of 0.5 percentage points on the coming year’s deficit this budget “is right on the border between insignificant and significant” (http://tinyurl.com/kqcv6gv). This means that while small business should be celebrating some much needed stimulus measures from the budget they should also continue to be cautious about Australia’s broader economic outlook for the time being.
That being said here are just three reasons to appreciate this budget, albeit cautiously if you are a small business owner:
Small Business Measure 1
1) Tax Cut: There has been a tax cut of 1.5 percentage points for incorporated businesses with revenue of less than $2,000,000 a year to 28.5 percent. There has also been a 5% tax discount for unincorporated businesses that is delivered in the form of a tax credit on their tax return it is however capped at $1000 for unincorporated businesses.
What this means: This means that a significant proportion of small businesses will see a reasonable amount of their revenue being put back into their hands. This money the government hopes will drive growth, employment and asset purchasing (driving retail).
1) While the 1.5% tax cut is useful and still positive for small business it is not the colossal driver of growth that it is being touted as. Just to keep it in perspective many small businesses pay out significant amounts of their profits as dividends to owners and thus have a marginal tax rate anyway. Where it is effective is when the profits aren’t paid in this manner and are in fact reinvested into growing the business.
2) Unincorporated businesses will in fact receive a fairly insignificant discount which works out to have a maximum impact of about $20 a week, which on the whole will not be a large factor for growth in these businesses.
Conclusion (Cautiously Positive): The tax cut provides the opportunity for increased capital which should help foster growth but its impact is being slightly over estimated. Business owners are urged to remain cautious about the projected growth of the economy and hold off on the optimism until the impacts of this budget on the long term economic projections (deficit, employment, and consumer confidence) become clear. That being said this measure is still a positive step in the right direction for small business owners.
Small Business Measure 2
2) Tax Break (Accelerated Depreciation): Small businesses will get an immediate tax deduction for any individual assets purchased that cost less than $20,000. This limit applies to each purchase individually and business can apply this change to as many items as they like until June 2017. Also any assets over $20,000 can be added together and depreciated at the same rate however the rate for the first year (2016) is 15% and 30% for the second year (2017). If the value of the pooled assets is below $20,000 it can be immediately deducted until June 2017.
What this means: Small businesses will spend less of their time tracking asset depreciation for tax purposes and will reduce their taxable income more significantly in a shorter period of time. By effect this will mean more money to improve businesses cash flow and help to drive growth or a little extra capital to purchase new assets. For a simple example of what this change will ‘actually’ look like for business owners visit http://www.budget.gov.au/2015-16/content/glossy/sml_bus/html/sml_bus-08.htm.
1) The ‘tax break’ is in truth simply accelerated depreciation whereby instead of smaller deductions over a longer period of time you receive an immediate significant deduction for a short time. This coupled with the reduced tax rate DOES see a fairly significant improvement in cash flow but there are considerations with this change. Firstly, the purchases must still pass as deductible assets so please ensure that your asset purchases will pass ATO inspection or you will be disappointed. Secondly, this accelerated depreciation simply draws forward spending that would have occurred later. This forward spending means that there may be some strain placed on businesses cash flow at a later date but this will largely depend on whether there is an improved economic outlook from this budget in the long term. If Mr. Hockey’s projection of a 3.5% growth rate holds true there will be no problems but if growth falls short…Consumer confidence and our deficit will be significantly damaged so with that in mind purchase assets judiciously.
Conclusion (Cautiously Positive): The Budget provides very a significant benefit to small business cash flow and will most likely be very useful for driving growth and profitability however it could create long term cash flow issues later depending on Australia’s economic state.
Small Business Measure 3
3) Tax Code Simplification: There is now a Fringe Benefit Tax (FBT) exemption on work-related portable devices that share “substantially identical functions”. For example providing employees with both a laptop and a tablet will now see both exempt from FBT.
What this means: This reduces the time business owners will need to spend dealing with Fringe Benefit Tax. This will also allow company owners to fully embrace the digital age by arming their employees with the portable devices they need to work remotely and on the move without a tax penalty. This change as a whole will help to boost staff productivity and help the economy by driving retail sales of devices, further improving the outlook for small business by driving consumer confidence.
Conclusion (Significant Positive): Deregulation is a beautiful thing when it comes to tax law. This budget measure will help improve staff efficiency, boost retail and hopefully have flow on effects for consumer confidence, the economy and as a result small businesses.
In conclusion this budget has been one of positives for small business however it is important for business owners to remain sensible when it comes to spending and purchasing until the impact of these changes is clear.
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All the best for your end of financial year!