Federal Budget 2011: Vehicle tax write-offs and FBT reforms target SMEs

Wayne Swan has confirmed that the Government will scrap the “narrow” Entrepreneurs Tax Offset and introduce a new package that includes a $5,000 tax write-off for small business’ vehicles.

The vehicle tax deduction will be introduced from 2012-13, with small businesses able to claim for the following year.

The Government claims that the move will result in a $350 million cashflow benefit to entrepreneurs. This figure represents a $15 million saving for the Government compared with the $365 million Entrepreneurs’ Tax Offset.

“We know the main asset of many small businesses is their ute or van, so the first $5,000 of the cost of a vehicle can now be immediately written off,” Swan said in his budget speech.

Under the scheme, a ute bought for $33,960, for example, will result in an additional $4,250 deduction – an extra tax benefit of $1,275.

The vehicle tax write-off, which was revealed by Swan on the weekend, has already received support from small business groups.

However, shadow federal small business minister Bruce Billson has claimed that companies are “lukewarm” about the offset due to overall rising costs and it’s questionable how many start-ups, especially those who operate solely online or from home, will benefit from the measure.

A revamp of the fringe tax benefit treatment of cars, another measure to be released prior to Swan’s speech, has also been included in the budget.

The move will remove the “unintended incentive” for people to drive further than they need to in order to gain a larger tax concession.

The Government says that the “sensible” reform makes sense on both a taxation and environmental level.

Currently, the sliding FBT scale rewards employer-provided cars that are driven further. However, this sliding scale will be replaced with a single 20% flat rate that applies regardless of the distance travelled.

The reform will only apply to vehicle contracts established after May 10, 2011 and will be phased in over a period of four years. The statutory rate for travelling over 40,000 kilometres a year will increase from 10 cents this year to 13 cents in 2012 and 17 cents in 2013, before being standardised across the board at 20 cents from 2014.

Small businesses will still use their ‘log book’ to chart the amount of distance travelled. The Government says that the change will improve its underlying cash balance by $953.9 million.

The Budget also includes measures to adjust the Pay As You Go tax system, but only for one year.

Under the changes, the Government will reduce income tax instalments paid under PAYG – a move, the Government claims, that will provide a $700 million cashflow benefit from lower tax payments in 2011-12 to small businesses.

Under the new arrangement, PAYG instalments for the coming year will be set at 4% above a small business’ taxable income for the previous year. This is half the statutory rate.

However, this benefit will only last for one year and the statutory rate will apply as normal in 2012-13.

The Government claims the move will make tax simpler for small businesses and help them grow.

In a statement announcing the PAYG change, Treasurer Wayne Swan says: “Small businesses are the backbone of our economy and deserve all the help we can provide.”