Legislation was introduced in Federal Parliament last week – the Tax Laws Amendment (Small Business Measures No 3) Bill 2015 – that proposes to make changes to the tax law to implement 2015 budget measures that will be welcomed by SMEs. The Bill will not be debated until after Parliament resumes on 10 August this year.
The Bill proposes:
- to provide a 5% tax discount or offset (to be known as the small business income tax offset) to individuals who run small businesses (businesses with an aggregate annual turnover of less than $2 million) or who pay income tax on a share of the income of a small business. The amount of the tax offset will be capped at $1000 per year
- to allow immediate tax deductibility of start-up expenses. The changes would allow small businesses and individuals to immediately deduct certain costs incurred when starting up a business, including government fees and charges as well as costs associated with raising capital, that are presently only deductible over five years
- to extend the FBT exemption that applies to employers that provide employees with work-related portable electronic devices, such as mobile phones, laptops and tablets. The amendments would extend the exemption to small businesses that provide employees with more than one work-related portable electronic device, even where the devices have substantially identical functions.
The Budget measure to enable small businesses to restructure without facing an immediate CGT liability is scheduled to be introduced in the 2015 Spring Sittings of Parliament (scheduled to run from 10 August to 3 December 2015).
Now for some details on the amendments.
The small business tax discount will be provided to individuals who run small businesses or who pay income tax on a share of the income of a small business. The amount of the tax offset will be 5% of the income tax payable on the portion of an individual’s income that is small business income. The maximum amount of the tax offset available to an individual in an income year will be capped at $1000.
The discount will apply from the 2015-16 income year i.e. from 1 July 2015.
The tax offset will be available to individuals who are small business entities, individuals who are a partner in a partnership that is a small business entity, and individuals who are a beneficiary of a trust that is a small business entity. The small business tax offset is designed to apply to trusts that actively carry on a business as a small business entity. Such trusts are unlikely to have beneficiaries under a legal disability that relates to a physical or mental disability. However, in the event that a trustee is assessed on the income of a beneficiary under a legal disability, the offset could be obtained by the beneficiary if they lodged a tax return, or a return was lodged on their behalf. Where a trust has a beneficiary who is under a legal disability because they are a minor, that minor will not have access to the tax discount.
An individual’s “total net small business income” will be comprised of the “net small business income” they make as a small business entity, together with any share of the “net small business income” of a small business entity that is included in the individual’s assessable income.
The small business tax offset for an income year is calculated by first determining the percentage of an individual’s taxable income for the income year that is “total net small business income”. This percentage is then applied to the individual’s basic income tax liability for the income year, with the amount of the tax offset being equal to 5% of the result of that calculation, up to a maximum amount of $1000.
For most individuals, total net small business income will be worked out by reference to their own net small business income, and their share of the net small business income of another entity.
In general terms, the net small business income of a small business entity (including an individual) is the assessable income of the entity that relates to the entity carrying on a business, less any deductions to which the entity is entitled to the extent the deductions are attributable to the income.
Adrian is a small business entity. For the 2015-16 income year, his taxable income is $100,000, his basic income tax liability is $25,000, and his total net small business income is $50,000.
To work out the amount of his small business income tax offset for the 2015-16 income year, Adrian first divides his total net small business income by his taxable income ($50,000/$100,000 = 0.5). The result of this calculation shows that half of Adrian’s taxable income relates to his total net small business income.
Adrian then multiplies the result of the first calculation by his basic income tax liability (0.5 × $25,000 = $12,500). The result of this second calculation shows that $12,500 of Adrian’s basic income tax liability is from his total net small business income.
Adrian’s small business tax offset is equal to 5% of the result of this second calculation (0.05 × $12,500 = $625). The full amount of his small business tax offset is therefore $625.
Adrian can claim the full amount of the small business tax offset for the 2015-16 income year because it is less than $1,000.
The tax law will be amended to allow taxpayers who are not in business or are a small business entity to immediately deduct certain expenses relating to the proposed structure or operation of a business.
The amendments will apply to expenditure incurred in the 2015-16 income year and later income years.
The expenses must relate to a business that is proposed to be carried on, including certain government fees and charges and costs associated with raising capital, where these expenses would otherwise be deductible over 5 years under existing rules.
The amendments will not apply to expenditure incurred in relation to an ongoing business or a business that has ceased to operate (including expenditure relating to the liquidation or winding up of an entity).
Deductible expenses will include expenditure on advice or services relating to the structure or the operation of the proposed business. This would include for example, advice from a lawyer or accountant on how the business may be best structured as well as services such individuals or firms may provide in setting up legal arrangements or business systems for such structures. It does not include the cost of acquiring assets that may be used by the business. Also includes professional advice on the viability of the proposed business.
The Bill proposes to extend the FBT exemption that applies to employers that provide employees with work-related portable electronic devices, such as mobile phones, laptops and tablets. The amendments would extend the exemption to small businesses (ie aggregated turnover less than $2 million) that provide employees with more than one work-related portable electronic device, even where the devices have substantially identical functions. In other words, the current substantially identical functions test would be removed for such devices.
Examples of portable electronic devices include a mobile phone, calculator, personal digital assistant, laptop, portable printer, and portable global positioning system (GPS) navigation receiver.
Currently, where a device has substantially identical functions to a device provided to the employee earlier in the FBT year, the later device does not get the FBT exemption, unless it is a replacement item.
The changes proposed will mean that a small business can provide a portable electronic device to an employee that has substantially identical functions to a device already provided to that employee in the same FBT year, and all of the devices would be exempt from FBT.
There is quite a lot of detail to be digested with these proposed changes and SMEs should consider talking to their accountant or adviser about how the changes might benefit them. Also, the Bill’s progress through Parliament should be monitored in case any changes to the amendments are made.
Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.