Revisiting the Budget for independent practices and small businesses

By Kathy Allen*
In recent years one of the least surprising days of the year has been Budget night – from a business and tax perspective at least.
It’s pretty much standard practice; most of the significant Budget measures are either announced as separate packages, or otherwise ‘leaked’ prior to the Budget announcent, presumably to manage expectations and test the waters a little. This year’s budget was no exception.
In an attpt to stimulate economic activity, and by extension tax revenue, the big winners were small business owners. While there are always some ‘losers’ in any Federal Budget (foreign aid for example), these are relatively few when compared with last year’s Budget.
With the Budget dust having settled, it is worth revisiting what the budget means for independent optical practices – which are small businesses – and other small businesses in the ophthalmic industry.
– Company income tax rate was cut to 28.5 percent for small businesses that operate through a company. The company income tax rate for small businesses (those with turnover of less than $2 million) was cut from 30 per cent to 28.5 percent from 1 July 2015. It’s worth noting though that companies earning more than $2 million a year will still be taxed at 30 per cent, so in some cases creative tax planning may be required.
– Imputation credit value is to rain at 30 per cent for small companies; imputation (or franking) credits pass on the tax paid in a company to the shareholders when dividends are paid. That avoids tax being paid twice on the same income. In the case of small businesses, the shareholders are usually the people operating the business. If they only receive a 28.5-per-cent credit because of the company tax rate reduction above, but still pay tax at their usual marginal rates of tax, the effect is that there is no reduction in tax. It is paid by the individual rather than in the company, but collectively the same amount of tax is paid by the group. The government has sought to prevent this from happening by announcing that for small business companies, imputation credits will continue to be passed on at 30 per cent even though the tax paid in the company is only 28.5 per cent.
– 5 percent income tax discount for non-company small business owners; one surprise announcent was a 5-per-cent income tax discount on income for non-incorporated businesses, also to take effect from 1 July 2015. Only around 30 per cent of small businesses in Australia operate through a company structure, so the cut to the company tax rate would have more limited impact in achieving the objective of stimulating small business activity. This measure effectively extends the tax rate cut for small business companies to more business owners; however it is capped at a total value of $1,000.
– $20,000 instant asset write-off; from budget night (12 May), assets with a value of less than $20,000 purchased by a small business can be claimed as an immediate deduction. That announcent was a rare, but well-received, turnaround. Ordinarily assets valued between $1,000 and $20,000 would be claimed over a period of years anyway, by way of depreciation, so the advantage here is purely one of timing. However, being able to claim the full value of an asset in a single year can result in a significant cash flow injection by bringing forward a reduction in tax payable. This write-off will apply until 30 June 2017.
– Immediate deduction for business setup costs; professional fees paid when setting up a new business (for example accounting and legal) must normally be written off over a five-year period. However, from 1 July 2015, these can be deducted in full in the year they are paid. This will help to improve cash flow in the early, more-volatile months for a new business.
– No capital gains tax for changing business structures; from 1 July 2016, small businesses will be able to change their legal structure without incurring capital gains tax. This ‘roll-over relief’ is already available for businesses that incorporate (that is, become companies) but doesn’t apply to other restructures, such as transferring to a trust. The measure now opens up more possibilities for restructuring where a business grows and finds that its original set-up is no longer suitable. There may still be state-based stamp duty implications though.
– Business registration to be simplified; a single online site will be established that will take care of all the compliance requirents for setting up a new business in one place. Currently there are a number of different steps required, including ABN registration, business name registration, GST and PAYG setup, and so on. That will all be streamlined into a single site.
– Budget deficit levy won’t be extended; while there were no changes at all announced to personal taxation rates, the government did say that the 2 per cent Budget deficit levy, announced last year on personal taxable income over $180,000, will not be extended beyond its scheduled end date of the 2016-17 financial year.
– Work related car expenses simplified; at the moment, there are four different methods that can be used to claim work-related car expenses. From 1 July 2015, two of these will be abolished altogether, leaving only the log-book method and the ‘cents per kilometer’ method. The ‘cents per kilometer’ method previously used three different rates, depending on the size of the car’s engine, however that will now be set at one standard rate of 66 cents per kilometer. That will have the effect of seeing those with smaller cars getting a nominal increase in their claim, while those with larger cars will incur a reduction in the amount they can deduct.
This Budget has been called a ‘safe’ one, and in many ways it is. In the final wash-up, there is very little to cause widespread offence … or excitent. Noticeably absent is any attpt whatsoever at tax reform, but with a number of reviews in the wings, that is (hopefully) still to come. What was a ‘budget ergency’ last year has this year morphed into a roadmap to recovery, with the Treasurer now stating that he believes that: “? our nation’s best days are ahead of us”. That is despite a dramatic increase in the Budget deficit over last year.
The government claims that its mandate for change has been frustrated by a recalcitrant Senate. This time around though, the government’s more-measured approach should (we think) see many of its proposals find a happier path through the Senate and into legislation, and that should in turn pave the way for more significant reform in Budgets to come.
*Kathy Allen is director of Dewings, an accounting and consulting firm that provides specialised business and tax advice for people in the eye-care industry. Dewings also provides advice in relation to practice and business valuations, and succession and retirent planning.