The new Australian Federal Budget has been a bit of a whirlwind over the last few weeks. There are lots of numbers being thrown around and arguments continue as to how the budget will affect the country in the long term. Some suggest that the cuts to school funding will cause significant problems in the future, while others are up in arms about ‘Netflix’ style taxes.
However, one of the biggest developments in this budget is the combination of temporary tax breaks and perks being afforded to small businesses – those with a turnover under $2 million per year. All of this may sound great on paper, and is certainly being touted by the budget proponents as a way to steer the Australian economy toward decades of prosperity, but what does it mean for you in the real world?
1.5% Tax Rate Decrease
The Federal Budget provides for a temporary business tax decrease of 1.5% This decrease is intended to empower small businesses to invest in improving operational capacity by freeing up cash that would have otherwise been committed towards tax expenditure.
We welcome tax relief efforts for small to medium businesses and would have liked to see greater tax decreases that would have helped make Australia more competitive amongst countries such as Singapore, which currently has a 17% company tax rate. We eagerly await the Tax Discussion Paper due to be released later this year.
Shrewd small businesses should take advantage of the tax savings in a way that provides a cushion for the future. For many small businesses, even a few thousand dollars can provide a great cash flow cushion. If you’ve experienced cash flow deficits in the last 12 months (where you couldn’t pay a bill because of cash flow issues) you may wish to consider setting aside these tax savings in a separate business account for a rainy day – it might just save you from losing a vendor or an employee.
$20,000 Write-Off
One of the most exciting aspects of the new budget is the $20,000 tax write off being afforded to businesses for equipment purchases. This can be very good news for businesses that need to invest in new or additional equipment.
Prior to this budget, such purchases could only be written off gradually by depreciating the asset over several years. Under the new guidelines, the entire amount of the purchase can be written off immediately – no depreciation required. This results in quicker realisation of the associated tax benefits of the purchase.
Let’s say a business makes a purchase that costs $15,000. Before the budget, this amount could be written off at approximately $3,000 in the first year, giving you a tax saving of about $855. The amount would continue to be written off year by year until the item is fully depreciated. Under the new budget, you are able to write off the entire amount, which gives you a tax savings of $5,700 in the same financial year. As a result, the business is able to generate $4,845 of extra cash flow for the year – money that can be used for further expansion.
The one downside of the $20,000 write off is that it may push some businesses to get new equipment when they don’t really need to, or don’t have the additional customer base to warrant it. Whereas the slow depreciation allowance forced businesses to think through the purchase more carefully, the new immediate deduction may push some to take extra risks.
Fringe Benefits Tax
Another welcome development in this budget is the expansion of the Fringe Benefits Tax exemption to portable electronic devices such as laptops. As a result, such items are no longer subject to Fringe Benefits Tax.