Millions of small businesses could benefit from a major overhaul of the way Pay-As-You-Go (PAYG) tax instalments are calculated, which will be a key feature of an $800 million small business and sole trader package to be included in next week’s federal budget.
The package will also include a significant IT investment aimed at ‘slashing’ small business red tape, Treasurer Josh Frydenberg said on Wednesday.
From next financial year, the government is proposing to change the GDP ‘uplift’ rate used to calculate quarterly PAYG instalments and GST instalments to 2% for the 2022-23 financial year. This would mean instalments would be much lower than the 10% that would have applied under the current formula.
If a business’ earnings exceed the amount calculated, it would then need to pay the extra tax owed at the end of the financial year.
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While businesses will still be able to manually set instalments with the Australian Taxation Office, the new PAYG formula is reportedly designed to avoid penalties arising from underpayments.
The government says the change will help around 2.3 million small businesses and sole traders, freeing up an estimated $1.85 billion in collective cash flow to allow them to invest in other areas of their businesses.
However, legislation would need to be passed in Parliament in order to introduce the change, which would likely happen after the election in May, if the government is re-elected.
The move to cap the GDP ‘uplift’ rate was welcomed by the Tax Institute, with general manager of tax policy and advocacy Scott Treatt saying an uplift of 10% would have been “an unnecessary burden on many small businesses” in the current environment.
However, Treatt said, if the change does happen, it will be important for businesses owners to stay on top of their tax and GST obligations throughout the year as “for some businesses who have recovered [from the pandemic], capping the increase at 2% for instalment payments may only defer higher costs until the final payment at the end of the year”.
PAYG in real time
The government is also proposing to update the PAYG system further from early 2024 to allow for PAYG to be calculated in real time, based on the current financial performance of businesses.
According to the government, the new system will provide an automatic refund of tax paid in the year if a business reports a large loss. If implemented, the change will initially apply to around 500,000 companies with PAYG instalment obligations.
This change is part of a broader effort to “leverage technology” to help “reduce compliance costs, improve processing times and support cash flow management for SMEs”, the government said.
State and territory tax returns and forms will also be pre-filled using the new system, with the Commonwealth to facilitate Single Touch Payroll data sharing between the ATO and state governments — a change that is estimated to benefit some 170,000 businesses that pay payroll tax.
Similarly, annual tax returns will also be pre-filled using business activity statements (BAS) for contractors using the taxable payments reporting system in key industries, including building and construction, cleaning, freight and courier services, and security and IT. The government says this will benefit around 190,000 businesses.
Business operators that use trusts would also benefit from streamlined administration, with the government proposing to allow all trusts to lodge income tax returns electronically from July 2024. This is expected to apply to up to 30,000 trusts that current lodge returns by paper.
The government also wants to change how microbreweries, distillers and oil importers pay excise. Small businesses with less than $50 million in annual turnover will be able to lodge and pay their excise returns automatically on a quarterly basis.
The government says that change alone will translate to a $100 million boost to the cash flow of those businesses.
“The Morrison government is slashing red tape, freeing up cash flow and ensuring [small and medium enterprises] spend less time buried in paperwork,” Treasurer Josh Frydenberg said in a statement.
“Our small business and sole trader package will deliver more than $800 million in compliance savings every year, allowing SMEs to do what they do best — invest, innovate and drive job growth,” he added.