The Government has just announced that it will introduce legislation into Parliament to clarify confusion around the applicable tax rate for companies.
By way of background, in recent times the Government has passed legislation to progressively reduce the company tax rate for companies with a turnover of up to $50 million as follows:
Company tax rate for entities under the threshold
Company tax rate for entities over the threshold
It appears that the Government’s intention in making these reductions was to encourage small to medium businesses to reinvest the tax savings in their business, and in turn promote employment and investment growth.
However, this intent became clouded recently when the ATO issued a draft Taxation Ruling in which it stated that, in its opinion, companies that were engaged in passive investments in shares and property could be seen to be carrying on a business, and thus eligible for the reduced company tax rate.
In response to this, the Government has stated that it will soon move to introduce legislation clarifying that only active trading companies qualify for the lower tax rate (and therefore not bucket companies or passive
Accordingly, if your company because of its turnover currently qualifies for the 27.5% tax rate and you are varying or otherwise calculating its PAYG Instalments, these should be calculated based on the reduced 27.5% tax rate only where the company is actively trading.
Bucket companies and companies that are solely engaged in passive investments in shares and property should operate (and calculate their PAYG Instalments) on the basis of the 30% rate applying; irrespective of the level of turnover.
On 31 March, the Government secured Senate support for the passage through Parliament of legislation to assist small to medium businesses. While company tax cuts were the headline measure, included in the changes was an increase to the Small Business Entity (SBE) turnover threshold. Backdated to 1 July 2016, the SBE turnover threshold has been increased from $2 million to $10 million. Treasury estimates that this will allow an additional 90 000 to 100 000 businesses to qualify for a range of SBE tax concessions including:
- Immediate deductibility for small business start-up expenses
- Simpler depreciation rules
- Simplified trading stock rules
- Roll-over relief for restructures of small businesses
- Deductions for certain prepaid business expenses immediately
- Accounting for GST on a cash basis
- Annual apportionment of input tax credits for acquisitions and importations that are partly creditable
- Paying GST by quarterly instalments worked out by the ATO
- Fringe benefits tax (FBT) car‑parking exemption and
- Pay‑As‑You‑Go (PAYG) instalments based on gross domestic product (GDP)‑adjusted notional tax.
With the legislation and therefore increased SBE eligibilty backdated to 1 July 2016, this presents a tax planning opportunity for business. Among the depreciation concessions is the $20 000 instant asset write-off – giving SBEs the ability to claim as a deduction the full cost of the asset in the year of purchase and installation (rather than having the item depreciated over a number of years). The real benefit of the write-off is an improvement to your cash-flow – bringing forward deductions rather than having them spread out over more than one year. To claim a deduction in 2016/2017, the asset must have been acquired on or after 1 July 2016 and first used or installed ready for use in your business on or before 30 June 2017. So if you are contemplating purchasing a depreciating asset for your business (such as furniture, machinery, tools, equipment, small motor vehicle etc.) you may wish to bring forward that purchase to before 1 July 2017 and enjoy the cash-flow benefit.
Over the coming months we will be detailing the other various concessions listed above.