Small business tax changes come into effect: What it means for you

Several beneficial SME tax changes announced in the federal budget in May are now law, after royal assent was given to the amending legislation yesterday.

However, it is important to note that some of the changes apply from 1 July 2015 so they are already in effect.

The changes that will benefit SMEs are outlined below.

Tax discount for small businesses

Small businesses now qualify for a 5% tax offset or discount (the small business income tax offset). This applies to individuals who run small 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.

It gets a little technical but 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” [the tax law just loves defining things!]. 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. Where an individual has a share of the net small business income of another entity included in their assessable income, the individual also reduces the share by any deductions to which the individual is entitled, to the extent the deductions are attributable to the share of the entity’s net small business income.

An individual’s total net small business income will not include a share of the net small business income of a corporate tax entity. The net small business income of a small business entity will not include assessable income that is a net capital gain or personal services income, unless the personal services income is produced from conducting a personal services business.

The net small business income of a small business entity will be calculated by working out the assessable income of the entity that relates to it carrying on a business, and subtracting from that assessable income the entity’s deductions, to the extent its deductions are attributable to that income.

This 5% discount applies from the 2015-16 income year, which means it came into effect from July 1, 2015.

Immediate deductibility of startup expenses

Small businesses and individuals can now immediately deduct certain costs incurred when starting up a business, including government fees and charges as well as costs associated with raising capital.

Unfortunately, these measures are also somewhat technical. 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 five years under current law.

For expenses to be immediately deductible, the entity claiming the deduction must be, for the income year in which the deduction is claimed: (i) a small business entity; or (ii) not carrying on a business and not connected with, or an affiliate of, an entity that carries on a business that is not a small business entity.

The kinds of expense that may be deductible include:

• expenditure on advice or services relating to the structure or the operation of the proposed business. This includes 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; and
• the payment to an Australian government agency (ie the commonwealth, a state or territory or an authority thereof – includes local governments) of fees, taxes or charges relating to establishing the business or its operating structure. Broadly, this category of expenditure includes regulatory costs incurred in setting up the new business. Examples would be the costs associated with creating the entity that may operate the business (such as the fee for creating a company) and costs associated with transferring assets to the entity that is intended to carry on the proposed business (eg the payment of stamp duty). It does not include expenditure relating to taxes of general application such as income tax.

These deductions apply to expenditure incurred in the 2015-16 income year and later income years.

FBT exemptions extended

The fringe benefits tax exemption that applies to employers that provide employees with work-related portable electronic devices, such as mobile phones, laptops and tablets, has been extended. Small businesses that provide employees with more than one work-related portable electronic device, even where the devices have substantially identical functions, will now get an FBT exemption. The previous law limited the exemption to the provision of one device per employee.

This will apply for the 2016-17 FBT year and later FBT years, which means it comes into effect from April 1, 2016.

The above changes are welcome for SMEs but as always with tax, there are rules to follow.

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.