Small Business Company Tax Rate Cut – Henry Tax Review

The Treasurer Wayne Swan today announced major changes to the tax system today following the release of the Henry Review into the Australian Tax system. The major changes affecting small business were:

  • Reduction of the tax rate from 30% to 28% from 1 July 2012 – being two years ahead of large companies.
  • Instant write-off of assets up to the value of $5,ooo commencing 1 July 2012
  • All other small business assets (except buildings) will be depreciated in a single depreciation pool at 30%.
  • Increase of the compulsory Superannuation contributions from 9% of wages to 12% of wages.

It should be noted that these are only announcements of the Government’s intentions at this stage and not law.

Reduction in Company Tax from 30% to 28%

In a move that will be welcomed by many small businesses, the company tax rate for small businesses will be reduced from 30% to a company tax rate of 28% from 1 July 2012. Although it has not yet been specified, I would expect the current Small Business Tax Definition of turnover less than $2 million to apply to the small business company tax rate of 28% to apply.

Instant Write Off of Assets up to $5,000

Allowing a tax deduction for 100% of the value of assets purchased up to $5,000 will make it easier for small businesses to invest and afford plant & equipment investments in their business. The new write-off allowance will apply from 1 July 2012, so we will expect to see a delay of expenditure in items valued between $1,000 and $5,000 in the months leading up to 1 July 2012. All businesses that sell capital equipment valued between $1,000 and $5,000  will have to be aware of this effect and expect strong competition in the months following 1 July 2012.

Single Depreciation Pool at 30%

A positive idea as the depreciation rates for tax purposes are confusing and an unnecessary burden of small business.

Whilst the 100% write-off and the 30% depreciation rate will make it easier for small business, it may distort the true profitability of the company when reporting financial performance to banks and other shareholders – decreasing fixed assets and decreasing profits. The financial performance of the company is however likely to match cashflow.

Compulsory Superannuation Contributions to 12%

Offsetting the company tax rate cuts will be an increase the superannuation contribution rate from 9% to 12% of  employees ordinary time earnings. This increase with not commence until 1 July 2013 and gradually increase to 12% from 1 July 2019 ( 9.25% in 2013/2014, 9.5% in 2014/2105 and then 0.5% increases each year until 2019/2020.

It will be interesting to see if these superannuation increases are offset against wage increase claims over that period.

I would love to hear your thoughts, leave a comment below.