Budget 2016: Tax “discount” for unincorporated businesses increased from 5% to 8%

Unincorporated small businesses will receive an 8% tax “discount” from the start of July, up from 5% last year.

In a statement accompanying the federal budget papers, Small Business Minister Kelly O’Dwyer said the government recognises “not all small businesses are companies” and therefore will not all benefit from cuts to the company tax rate.

The unincorporated tax discount will increase from 5% to 8% from July 1 and will continue to be capped at $1000. Businesses must be turning over less than $5 million in order to qualify.

In line with the gradual cuts to the company tax rate, also announced in tonight’s budget, the unincorporated tax discount will continue to increase to a final rate of 16% by July 1, 2026.

The government estimates 2.3 million unincorporated small businesses will be eligible for the discount.

“This will provide unincorporated small businesses with improved cash flow and enable profitable unincorporated businesses to reinvest in their business to help them grow,” said O’Dwyer.

According to the government, a sole trader with an unincorporated business turning over $2.5 million and a taxable income of $150,000 would pay $46,447 in personal income tax, including the Medicare levy, under the current system.

After the unincorporated tax discount is applied, along with other changes to personal income tax, the sole trader would pay $45,132 in tax and would therefore be $1,315 better off. The unincorporated tax discount would account for $1000 of this amount.

The increase in the unincorporated tax discount is projected to cost $150 million each year from the 2017-18 financial year, at a total cost to the budget of $450 million over the forward estimates.