Effects of Tax cuts on Small Business in Australia

July 14, 2015
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A number of interesting developments has been introduced by 2015-2016 Federal Budget to the tax landscape of Australia. Number of incentives including two significant tax cuts has been introduced by the Australian government to allow small business to improve their cash flows, encourage competition and growth, and allow for hiring of additional employees.

Opinion of the Prime Minister

Mr.Abbott said that only the incorporated entities will receive the small business tax cut. There are several ways in which this small business tax cut will be found to be effective as it will help to stimulate investment, job security, generate employment opportunities and last but not the least, will boost productivity (Janda, 2015). Also the offsetting effect of all new spending would be responsible and fair savings. The push to extend the new 28.5% tax rate to the first $5 million of profit for all companies is rejected by the Abbott’s government. Top corporate tax rate will still be paid by big businesses on every dollar they earn.

According to the Prime Minister, part of the jobs package will be formed by the tax cut for small business. “The small businesses of today are likely to start the new industries of tomorrow. The best antidote to sunset industries is sunrise ones and these are most likely to emerge from an enterprising small business” (Ensbey, 2015) said the PM. Of the two tiered structure he said it would be fundamentally popular and good for employment and also it won’t cost the budget too much.

Tax deductions and Small business concerns

A small business with $50000 profit could save roughly $5700 a year. This is the combined effect of two measures that is 28.5% tax rate and tax deduction

The number fewer than 20 are defined as small business. But here these cuts can only be accessed by businesses turning over upto $2 million. Even if much profit doesn’t arise from a business and profit is just a fraction of 2 million, it is expected that the tax cut will add thousands of dollars every year (Morning, 2015). Treasurer’s wants the small businesses to grow and a step can be taken towards it by using these thousands of dollars a year. For Example meeting interest payments and borrowing money.

“After the Reserve Bank cut interest rates the Treasurer said now is the time to have a go, to borrow some money and invest whether you are a household or small business. None of my people get excited about the tax break” (Colgan, 2015) said the Council of Small Business of Australia executive Peter Strong. He says reintroduction of an investment allowance is what the Council wants to see and it’s all about spending. The average small business considers it to be more meaningful. 50% of the cost off the tax bill could be claimed by businesses in the last investment allowance which was basically a tax deduction and not a tax cut in late 2009. Under that, deductions could be claimed for essential equipment worth over $1000.

Major changes in the new policies

This small business tax cut has been proposed with a view of fulfilling the government’s hopes to boost the overall economic growth of Australia constantly for the next few years.

Tax cuts for company owners and companies

Tax cut of 1.5% was announced before the budget but it was not well known that same reduction will be provided to the business owners on their personal income tax that is levied on the earnings of their companies. When the income tax of a business owner is calculated, a similar tax credit will be received as 28.5% that they will be required to pay instead of what their companies were supposed to pay earlier, that is 30%. The major reason behind this is that the franking credit rate is still at 30%. In this way the business owner will be able to receive a 1.5% tax cut (Waters, 2015).

Depreciation

All the individuals will be provided an immediate tax deduction for all the individual assets that are purchased by them and each costs less than $20000. Earlier, this provision was applicable only on those assets whose value was less than $1000 each. Moreover, instead of splitting this deduction over several years, with this new policy, a full deduction will be offered to the tax payers that are applicable on Vehicles, tools, Information Technology equipment, etc. that are purchased in the current financial year (Hutchens, 2015). Businesses are allowed to reinvest this money for future growth prospects, or could be passed on to the owners. Also the businesses can claim unlimited number of purchases.

The Sole traders will enjoy less tax

Most of the Small businesses in Australia instead of incorporating as companies are generally incorporated as sole proprietorship, partnership, or as a trust. This is why, the rule is now applicable on these categories of small businesses as well as those unincorporated business firms where the annual turnover is less than $2 million. This point can be explained with the following example.

For instance, a sole proprietor is entitled for a deduction of 5%. In this manner, if a tax for $16000 is pad by him, he will get a deduction of $800. With the new policy, since the amount that has been capped for deduction is $1000, thus, they could claim for the deduction as a tax credit while filing their tax returns (Ridd, 2015).

Share Schemes

Previously, the rule was that even if any of the employees are unable to make any money or the shares are worthless, then also they were forced to pay taxes even on the share options that are offered to the employees in the old taxation laws. But in the new proposed policies, the employees will have to pay taxes only if the employees would be able to realise some benefits from these options.

Digital Upgrades

For the next 4 years, the government has proposed $255 million under the government plan that will be used to update the computer systems and will enhance the ways of interacting with the individuals and the business firms. This is going to be good news for those small business owners who want to interact with the government for several different things. With the upgraded systems, the business owners would be able to use the online services such as registration of business names, payment of taxes etc. in an easier and comfortable manner (Morning, 2015).

Deductions on Start-up Costs

Most of the professional expenses are entitled to get an immediate deduction for the businesses that are starting as new business firms in the area of professional, legal and accounting advices.

Subsidy on wages

In order to employ such people that have been unemployed from a longer period of time, are young or old, the government has proposed an amount of $1.2billion to help the business firms in the form of subsidies. According to the government, to meet employer demands there will be more flexibility for the job seekers even if several other types of wage subsidy programs are replaced, in total the same amount of $6500 is the subsidy for employing a young job seeker and $10000 is the subsidy for the mature-aged job seeker (Ridd, 2015).

Crowd Funding

Crowd funding refers to the process of procuring of capital in smaller amounts from a large number of investors. It is often for a specific purpose such as new product development (Ridd, 2015). Now small businesses can invite a large number of investors to help them to grow. Apart from this, several restrictions and the red tape that are associated with this form of equity funding are removed by the new laws introduced in the budget (Ridd, 2015).

GST on Digital Imports

The goods and services tax will also be imposed by the government on the digital products and services that are bought from overseas. It will also be applied to the software, so the businesses need to be aware. They will be entitled for a claim of most of the GST that is paid by them. For common people it will apply to the movies, games and songs that they buy from overseas companies.

Tax Relief for Changing the Structure of the business

The small business firms will not be required to pay the capital gains tax while changing their legal structure. In the existing policies, the small business firms including the sole proprietorship as well as the partnership firms were required to pay a capital gain tax while making any changes in their legal structures. This capital gain tax was a potential hit for all of these firms. But with the new policies, these business firms can change their legal structures without incurring and capital gain taxes.

Conclusion

The previous implemented policies were focused on promoting the interest of the large business firms. The small business sector is always taken for granted by these parties.

The new tax cut will benefit the small business firms in several ways:

It will help the small business firms to acknowledge their administrative costs.
It is focused on encouraging the growth of the sector of small business firms.
Will help the small business firms to use the extra income for expansion, innovation, and investment.
Small businesses will be relieved from the pressure of income tax and other taxes.

Australian government has been able to recognize that the strength of the Australian economy is based on the health of the small business sector. With the above analysis, it would not be wrong to say that lowering the taxes is a viable and a feasible option. Several countries including South Korea, Belgium, France, Canada, Spain, UK, Netherlands, USA have already reduced their taxation rated for the small business firms. The unemployed people in Australia who have the skills will be supported by the government to reach their future goals and igniting their careers. The small business and job package will also contribute to the growth of the small business firms and employment. In this manner, the small business owners will be having several prospects for growth and opportunities.