Small Business Tax Cut

Executive Summary

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.

The first is Abbott Government hands 1.5% tax cut to the companies that operates with an average annual turnover of less than or equal to $2 million which are said to be the small business companies. This means that small companies will have their tax lowered from 30% to 28.5% that is the lowest small business tax rate in more than 50 years.  It is expected to be applied from 2015-16 income year.The second is the individual tax payers with business income from an unincorporated business will get a small business tax discount. Overall, a 5% of the income tax that is payable on the operating income of business that has received from an unincorporated small business entity will be the discount. The discount here is going to be delivered as an offset for that and it has been capped at the value of $1000 in every financial year to each individual.

Along with the tax cut, tax deductions were also extended by the government to drought ravaged farmers for water facilities and fencing. The Treasurer said “this is about getting on with it, getting people to have a go”. In his opinion if it works then he would predict that the businesses just needed that trigger to go out and buy things and they already had cash ready.

Introduction

Australian government understand the feelings of people in small business. They are the heart of the economy and fell disadvantaged as compared to big business entrepreneurs. Small businesses employ nearly half of Australia’s private sector workers. Small businesses are the part of the community in a way that big businesses can never be. For all companies that are maintaining the arrangements for the investors, including the self-funded retirees, the existing franking credit rate for such distribution will be 30%.The purpose of this assessment is to evaluate the effects of the changes in this policy over the sectors of the economy. The two major sectors that are influenced and affected by this change are the government and the small business firms. The paper evaluates the opinion of the prime minister and the major changes in the policies that could affect the business owners in Australia.

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.