Small business tax cuts pass Parliament but larger corporates miss out on relief

On Friday 31 March 2017 the Government struck a deal with the Senate crossbench to pass the reduction of the company tax rate to 25% over 10 years. In the event what was passed was a much watered-down version of what was previously intended to be the Government’s key economic policy initiative.

Under the deal reached, small and medium businesses will benefit as:

  • the company tax rate reduces to 25% over the 10 year period; and
  • the turnover threshold increases so that more company businesses can access the lower tax rate.

The standard company tax rate will remain at 30% for companies with an annual turnover in excess of the small/medium business turnover cap.

Dividend franking

There will be no changes to the application of the dividend imputation provisions as the standard corporate tax rate will remain at 30%. Large companies will continue to frank dividends at 30%, as will small and medium businesses, notwithstanding they pay company tax at the lower rate.

Unincorporated small/medium businesses

There will be an increase in the rate used to calculate the small business tax offset for unincorporated small/medium businesses. But the offset will remain capped at $1,000, so the offset will continue to be of limited practical effect; certainly not as advantageous as the small/medium business company tax cuts.

Planning opportunities

The tax rate reduction may warrant a review of the structuring arrangements of small and medium businesses that do not currently operate through a company structure. However, although the locked-in company tax rate cut may be a sufficient reason to give close consideration to a move into a company structure, any structural change would require a wide ranging and careful review, taking into account many factors.

The tax cut changes in detail

The changes for small and medium business company involve:

  • a reduction in the small business company tax rate from the current 28.5% to 25% over a 10 year period; and
  • an increase in the turnover cap at which companies will be able to access the lower small/medium business tax rates (the ‘glide path’).

Company tax rate reduction ‘glide path’

Income year

Turnover cap/lower tax rate Standard tax rate
2015-16 $2 million:   28.5% >$2 million t/o:   30%
2016-17 $10 million: 27.5% >$10 million t/o: 30%
2017-18 $25 million: 27.5% >$25 million t/o: 30%
2018-19 $50 million: 27.5% >$50 million t/o: 30%
2019-20 to 2023-24 (incl.)

$50 million: 27.5%

No change for 5 years

>$50 million t/o: 30%
2024-25 $50 million: 27% 30%
2025-26 $50 million: 26% 30%
2026-27 $50 million: 25% 30%

 

 

 

 

 

 

 

 

 

 

 

Small business tax offset for individuals

Currently, the offset is calculated at 5% of an individual’s net small business income, but with an annual cap of $1,000. The rate for calculating the offset will increase in accordance with the following table.

Net small business income

2015-16 5%
2016-17 8%
2024-25 10%
2025-26 10%
2026-27 10%

 

 

 

 

 

In addition, a separate turnover cap of $5 million per income year will now apply to individual small businesses claiming the small business tax offset. However, the aggregated turnover cap remains at $10 million for accessing the other small business tax incentives (other than the small business CGT incentives for which the existing eligibility criteria will remain unchanged).

Observations

Craig Cooper, Director of the Tax Services division of RSM Australia in Melbourne, makes the following observations on the deal reached by the Government in his article of 3 April 2017, Small business tax cuts pass Parliament, but no relief for larger corporates.

  • The original company tax cut Bill proposed a reduction in the company tax rate from the current single rate of 30%, to 25% over a 10 year period, with an accelerated rate reduction timetable for small and medium businesses, leading to a single company tax rate of 25% in 10 years.
  • In the event, while the compromise deal reached may be a political victory for the Government, it is far from the proposed economic victory.
  • It is widely acknowledged Australia’s corporate tax rate, at 30%, is internationally uncompetitive and becoming more so as the current trend for reducing tax rates continues apace. A reduction, the Government argued, would be an important factor in lowering the return on investment threshold for large company investments. Further, there is widespread support for the view that company tax cuts ultimately benefit workers through capital deepening, new and more hi-tech jobs, and higher incomes.
  • Although, the capital necessary to improve the Australian economy’s performance is provided by big business investment, the compromise legislative package provides tax relief for only small and medium businesses. While an important part of the Australian economy, the SME sector is not the sector which has the capacity to commit significant investment funds; import next-generation technology; or provide the economy with the step-change it requires to return to the trend growth line.

It is noted that, as big business will not receive any benefit from these changes, there will be a significantly smaller loss to revenue. Whether bi business will receive benefits in the future will depend greatly on the outcome of the current political battle of will and willingness to compromise.