Small- to medium-sized enterprises (SMEs) continue to be some of the key beneficiaries of the Federal Budget, with the 2016/17 instalment going further than had previously been expected. Prior to tonight, there had been an understanding that the rate of company tax faced by SMEs would be lowered as an extension of the policies introduced under the 2015/16 Budget. The latest Budget has seen the unveiling of the Ten Year Enterprise Tax Plan, a $9.2 billion package that is designed to reign in the company tax rate and enable SMEs to grow and invest.
So, how does it all work?
The primary change in this package is the eligibility criterion for what a small business can access as tax arrangements. Previously, this threshold was set at annual turnover (that is, revenue) of $2 million. This has now been changed to $10 million, meaning that thousands more businesses will now qualify as ‘small business’, in terms of tax treatment. This turnover amount of $10 million is significant, and arguably is now advantageous to many businesses which are quite firmly “medium-sized”. These enterprises turning over less than $10 million will also be able to access the instant asset write-off scheme, as introduced in last year’s Federal Budget, meaning that they can claim immediate tax deductions for any asset purchased that is worth less than $20,000, until 30 June 2017.
The main policy in the Ten Year Enterprise Tax Plan is a series of stepped reductions in the rate of company tax – which is paid on corporate profits. Starting from 1 July 2016, the company tax rate will reduce from 28.5% to 27.5% for all those who qualify as ‘small business’ (now meaning those with annual turnover of $10 million or less).
The turnover threshold which marks eligibility for the lower company tax rate will continue to increase over the coming years:
• $2 million to $10 million in 2016/17
• $10 million to $25 million in 2017/18
• $25 million to $50 million in 2018/19
• $50 million to $100 million in 2019/20
Indeed, by 2019/20, we would have well and truly crossed the SME standard, as annual turnover of $100 million is certainly no mean feat.
By 2023/24, all businesses will be eligible for the lower 27.5% rate of company tax, which will then be progressively reduced to 25% by the end of the decade, in 2026/27.
The Federal Government is justifying this in a two-fold way. Firstly, from a business investment perspective, as they contend that lower company taxes will spur non-mining investment and hence, growth. This is particularly important as Treasury notes that non-mining businesses have yet to commit to any significant new investment plans, which can make our economy’s transition away from being resource-centric particularly fraught.
Secondly, as an international point of parity, a company tax rate of 25% will place Australia in the median of OECD nations. Treasurer Scott Morrison is pushing this as a method to boost Australian competitiveness in the business sector, and support the optimistic growth forecasts embedded into the Budget.
Interestingly, and perhaps unconvincingly, the government expects company tax revenue to be increasing over the forward estimates, from total company tax collections of $70.1 billion in 2016-17, to $92.3 billion in 2019-20.