Company Tax Cut from the 1st July 2015.
From this date, the corporate tax rate will be cut by 1.5% from 30% down to 28.5% for small business entities (SBEs) i.e. those businesses with a turnover of less than $2 million, including the turnover of any connected or affiliated entities. This is expected to benefit approximately 780 000 incorporated small businesses. As the tax cut will apply from 1 July 2015, companies with PAYG instalments can benefit from their first payment after 1 July 2015.
Despite this change, the maximum franking credit rate will remain at 30%
EXAMPLE – Company Tax Cut Impact
A company has a turnover of $1.6 million, with taxable income of $400 000.
2014/2015 – Under the pre-Budget law, the company would have a tax bill of $120 000 ($400 000 x 30%).
2015/2016 – Under the proposed law, the company would have a tax bill of $114 000 ($6 000 less than under the old law).
With Australia now having a two-tiered company tax rate, if your company’s turnover is around $2 million, it’s worth keeping a close eye on it at year-end from 2015/2016.
While we do not suggest that you avoid growing your business just to stay under the $2 million threshold and attract the lower company tax rate, if your turnover is nearing that mark at year-end, it certainly pays to stay under that mark from a tax perspective – perhaps by deferring invoicing where practical.
Tax Cut for Unincorporated Small Businesses
A new 5% tax discount will be given to individuals with business income from an unincorporated business (i.e. sole trader, trust or partnership structure) that is an SBE (see earlier for the definition of an SBE). The discount, to be provided by way of a tax offset in a business owner’s individual year-end tax return, will apply to the income tax payable on the business income received and will be capped at $1 000 per individual, per year. This will take effect at the same time as the small business corporate tax cut (2015/2016).
This is a welcome measure as many small businesses are not incorporated and thus would not derive any benefit from the above-mentioned corporate tax reduction.