It has taken a long time and a lot of discussion to get the company tax cuts through the Senate but at long last, we have something concrete to report.
Company tax cuts
The final agreed tax rate changes will apply to companies carrying on a business and will be as follows:
Companies with a turnover (gross business income) of less than $10 million will receive a reduction in their tax rate to 27.5% this financial year (2016/2017).
In 2017-18, it will be up to a $25 million turnover.
In 2018-19, it will be up to a $50 million turnover.
The tax rate will progressively reduce down to 25 per cent as follows for companies with a turnover up to $50 million:
2025 financial year 27%
2026 financial year 26%
2027 and beyond 25%
Companies will only be able to frank dividends to the extent of the company tax rate that applies to them in the current year. However, they can use the turnover from the previous year to determine what tax rate applies. This gets around the practical difficulty of knowing what percentage to frank dividends during a year given that the final turnover will not be confirmed until the end of the year. Examples of how this will work are outlined at the end of this article.
SBE (Small Business Entity) concessions
There hasn’t been much media coverage of this aspect but it also passed the Senate. The SBE threshold has increased from $2 million to $10 million. This affects access to the following concessions from 1 July 2016:
Immediate deductibility for small business start-up expenses
Simpler depreciation rules (generally results in accelerated depreciation and includes the immediate write off for assets of $20,000 up until 30 June 2017, after this the write off threshold reverts to $1,000)
Simplified trading stock rules
Roll-over for restructures of small businesses
Deductions for certain prepaid business expenses immediately
The ability to account for goods and services tax (GST) on a cash basis
Paying GST by quarterly instalments.
The current $2 million threshold has been retained for access to the small business Capital Gains Tax concessions.
SBE unincorporated tax discount
Similarly, there has not been a lot of media discussion about the SBE unincorporated tax discount but changes to it were also included in the new legislation.
Currently, the discount is 5% (capped at $1,000) of the eligible individual’s income tax liability that relates to their small business income. The $1,000 cap will remain but the discount will be:
8% in 2017 – 2024 financial years
10% in 2025 financial year
13% in 2026 financial year
16% in 2027 and beyond.
If you need any assistance with understanding how these change will affect you, please contact us.
Franking credit examples
ABC Pty Ltd had a turnover of $9 million in the 2015/2016 financial year. They have resolved to declare fully franked dividends on 19 November 2016 to all shareholders. Given that their 2015/2016 turnover was $9 million, the maximum rate the dividends can be franked would be 27.5%. This is the case even if the actual turnover for 2016/2017 ends up being $11 million.
XYZ Pty Ltd had a turnover of $20 million in the 2015/2016 financial year and $22 million in the 2016/2017 financial year. They have resolved to declare fully franked dividends on 31 March 2017 and 31 August 2017 to all shareholders. For the dividend declared on 31 March 2017 (i.e. in the 2017 financial year), the franking percentage will be 30% being based on the fact that their turnover for the 2016 financial year would place them above the $10 million threshold in the 2017 financial year. For the dividend declared on 31 August 2017 (i.e. in the 2018 financial year), the franking percentage will be 27.5% being based on the fact that their turnover for the 2017 financial year would place them below the $25 million threshold in the 2018 financial year.