The federal government is seeking to bring tax cuts aimed at Australia’s small and medium businesses into effect four years earlier than originally planned, costing the government $3.6 billion over four-year forward estimates.
Treasury costings leaked to Fairfax reportedly reveal the government has decided to adopt industry calls to bring forward the already legislated tax cuts for companies with under $50 million in annual turnover, which would see them fully implemented by 2022 rather than 2026. The documents also reveal it’s considering extending the popular $20,000 instant asset write-off threshold.
The government’s original enterprise tax cut plan, the first phase of which was passed early last year, initially planned to drop the corporate tax rate for SMEs from 30% to 25% over a 10-year period, with the first drop to 27.5% coming into effect this financial year, before a staggered drop to 25% by 2026-27.
However, the leaked costings reportedly show the government is considering bringing in a drop to 27% in the next financial year, followed by a reduction to 26% in 2020-21 and then a further cut to 25% in 2021-22.
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This plan is reportedly the government’s preferred option, however, an alternate plan would see a similar drop to 27% next financial year, followed by a yearly 0.5% reduction until the company tax rate reaches 25% in 2024. This would cost the government a smaller amount of around $2.4 billion, reports Fairfax.
The cost of bringing forward the cuts will reportedly be offset by $1.3 billion in savings due to the scrapping of the big business tax plan, allowing the government to hit its tax revenue cap of under 23.9% of GDP a year earlier than expected. However, the costing documents reportedly say the government will be required to try and legislate for further personal tax cuts or new company tax cuts in 2020 to stay below the cap.
Small business policy an election issue
The internal documents also reportedly reveal that small business tax policy will well and truly be an election issue for the Coalition, as has been speculated previously due to the government returning the small business ministry to cabinet.
“We could commit to providing tax relief when we reach the tax cap, without any specific tax cut policy, but this will be a less tangible and more complex growth story to take to the election,” the internal documents state, according to Fairfax.
“It will also allow Labor to claim we are still planning to give billions to millionaires and multinationals but we are keeping the details secret.”
Speaking to SmartCompany, chief executive of the Council of Small Business Organisations Australia Peter Strong says he supports the move by the government, saying it’s nice to see the new leadership listening to small business issues.
Strong also believes the reported $3.6 billion cost is overblown, believing the overall cost will be offset by further earnings coming from GST as sales increase at Australian businesses benefiting from the cuts.
“This would be very good for the economy, and we think it would quite quickly have a positive impact on Australian businesses,” he says.
“The government has a difficult road ahead [of the election] but if they keep working on small business issues they’ll build confidence in the small business community, which will add confidence to the broader community itself.”
Strong thinks the accelerated introduction of the tax cuts will mean real bottom-line changes for profitable small businesses, saying they’ll receive more money to invest back into the business.
However, Paul Drum, general manager of external affairs at CPA Australia, believes the proposal may struggle to pass through the Senate, calling the issue a “moot point” and calling for greater reform to Australia’s corporate tax rate.
“The government and the opposition should really be considering more ambitious tax changes to help Australia’s 2.1 million small businesses,” Drum says.
“Even the targeted 25 percent rate on the proposed tax glide path for small companies remains internationally uncompetitive and of little help for startups. We would like to see tax reforms that would assist small business with cash flow difficulties in their first few years.”
Tax specialist at Pilot Partners Murray Howlett agrees it will be hard for the government to pass the changes through the Senate, but also highlights the fact changes to the corporate tax rate do little to help out small businesses ran through non-company structures.
“Smaller businesses are often ran through trusts or partnerships, so this policy change actually misses quite a big portion of business operations and many small businesses are being overlooked,” Howlett says.
$20,000 instant asset write off slated for change
According to Fairfax, the $20,000 instant asset write off may also receive a facelift, with the government reportedly looking to either extending the eligible turnover threshold from $2 million to $10 million or expanding the $20,000 cap.
However, it appears the first part of that plan has already occurred, with the government’s first tranche of tax legislation from last April changing the broad government definition of a small business to one with annual turnover of $10 million or under. This gave those businesses access to small business concessions such as the $20,000 instant asset write-off.
According to the Australian Taxation Office’s website, the write-off scheme is available to small businesses with an aggregated turnover of less than $10 million.
Strong is supportive of the second aspect of the government’s plan, saying he suggested the threshold be upped to $100,000 for SMEs to do once-off purchases for significant business costs.
“That means SMEs could buy a big piece of machinery, or do a fit out for a new store,” he says.
Howlett calls the potential changes to the scheme “more significant” than any proposal to modify company tax rates.
“That, to me, is a far more significant change than the tax rate change. Businesses often make their investments based on their abilities to make a tax claim on them, so a change here really will drive small business behaviour towards buying more plant and machinery and buying it sooner,” he says.
However, small businesses will be looking for more than just tax policy when it’s time to go to the polls, with COSBOA pushing heavily for more government focus on simplification of workplace relations and a strengthening of the VET sector, says Strong.
In a statement, acting Shadow Treasurer Jim Chalmers called the tax plan leak “devastating”, and accused the government of being “divided and illegitimate”.
“Labor won’t be distracted by every desperate thought bubble or leak from the government. We have a fair and responsible plan to target tax relief to the businesses who need it most,” Chalmers said.
“We will provide tax cuts to small and medium sized businesses, and our Australian Investment Guarantee will encourage companies to invest onshore.”