Tips of the Trade: What the recent budget means for you

Tuesday, 09 Jun 2015

What does Mr Hockey consider to be a small business? You’re included in his definition and can count yourself as part of the ‘engine room of the economy’ if your business has a turnover of less than $2 million (including the turnover of any connected/affiliated entities). It’s also important to note that none of this is law just yet, it’ll need to pass through the Senate, though it appears to have bipartisan support meaning it should sail on through unopposed.

I’ll address two of the most interesting changes.

Tax rate cut

For any small business operating as a company there is a cut in the company tax rate from 30 per cent to 28.5 per cent, which is due to kick in from 1 July 2015. Labor have one-upped the LNP by suggesting it should be dropped down to 25 per cent, but time will tell if that becomes reality. For any artists operating their business through a company structure this could provide cash flow relief in the form of lower income tax bills.

For those operating a small business via a different structure (for example if you’re a sole trader or partnership) the LNP is offering a 5 per cent tax discount up to a maximum of $1,000 per person, per year.

Please be aware that whilst it may be okay to ‘trap’ royalty and other passive income in a company to enjoy the lower tax rates available, it may not be advisable to use the same strategy for ‘active’ income such as door takings at a gig, due to the implications of the Personal Services Income regime and the general anti-avoidance provisions.

Immediate write-offs

This is the one that has set journalists and vox-poppers alight with much ill-informed debate and speculation! The news has made artists and gear shops sit up and take notice, but it is important to understand that you may not be radically better off, cash-wise, in the long run under these changes. Let me clear it up.

Before Joe’s budget announcement – before Tuesday 12 May 7.30pm precisely – small business could acquire a capital item, such as a set of speakers, valued at $1,000 or less and ‘write it off’ (claim the deduction) immediately in that year. Musical instruments, studio gear, vehicles and the like are all eligible to the extent they are used for income-producing (that is, business) purposes.

Now, that limit has been lifted to $20,000. Small businesses are able to claim that immediate deduction for business assets they buy that are valued at or under $20,000, rather than wait to have this deducted (depreciated) over a number of years from your taxable income. Note if you acquire an asset valued over $20,000 you can still claim depreciation - at a rate of 15 per cent in year one and 30 per cent every year thereafter.

How much of a saving this will make will depend on how much income you’re bringing in, but it could be anywhere from nothing up to 49 per cent. It’s really important to remember here that it is a tax deduction and not a tax refund – a tax deduction reduces your taxable income thus reduces the amount of tax you pay. Contrary to popular opinion the government isn’t buying you a new car.

Bottom line, it is the same deduction, just done in one year rather than over many. You have until 30 June 2017 to take Joe’s offer up.

There is much more to be said about the small business budget changes, but alas, space and time are against us. As always, when in doubt, seek professional help.

Written by Ben Fletcher, Director, Moneypenny Business & Taxation Services

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