Tax cuts aimed at giving small businesses a shot in the arm

MORE than three million small businesses could be eligible for a tax cut this financial year, but are you ready to take advantage of it? Here’s what you need to know.

Small business owners need to make sure they can take advantage of tax cuts.

MORE than three million small businesses could be eligible for a tax cut this financial year after federal parliament agreed to lower the tax rate for all companies with a turnover of $10 million or less to 27.5 per cent.

Continuing with its election mantra of “jobs and growth”, the government is hoping that tax cuts for smaller companies will spur them to funnel the tax savings back into their businesses to boost employment and investment.

Before the changes, companies with turnovers below $2 million would have been paying tax at 28.5 per cent and those with turnovers up to $10 million were being hit with the full corporate rate of 30 per cent.

The tax rate will keep falling to 25 per cent in a decade and eventually apply to businesses with turnovers of up to $50 million.

It’s a bonus for small businesses but the challenge is making sure you can take advantage of these savings.

The first thing to work out is if your company is eligible for this lower rate, said Adrian Raftery, associate professor at Deakin Business School.

“Although these tax cuts are labelled ‘small business’, they are only available to those who operate via a proprietary limited company,” Mr Raftery said. “If you are a sole trader or partnership or trade via a family trust then these tax cuts are not applicable to you.”

But don’t race to change a corporate structure just to take advantage of tax cuts as this may be considered tax avoidance. “Other legitimate reasons for switching to a company structure may include the employment of staff, insurance protection of limited liability as well as conditions of certain contracts,” said Mr Raftery.

Increasing staff will be certainly a priority for Ben Lucas when he has more money to invest in his Flow Athletic fitness business.

He said firms which stand still in his industry would go backwards.

“Our biggest cost is staff because we’re all classes and customer service. So every dollar we save we invest into more classes,” he said.

Business owners who consider taking added income out of the company, either as a wage or a dividend, should consider that this income will be taxed at the individual taxpayer’s marginal tax rate, said Mr Raftery. “Any tax savings that the lower company tax rate provides would effectively be lost.”

Another way to benefit is putting business deductions in a personal name. “If you are deriving a taxable income above $37,000 personally then look to have business-related expenses such as mobile phone, home office expenses and cars in personal names and get a higher percentage back from the tax office based on your marginal tax rate,” he said.

“The downside is that your personal cash flow will diminish as you are using personal rather than company funds.” 

Fit For Business is a partnership between Leader News and Allianz