FEDERAL BUDGET 2011: SMEs granted $5,000 car deduction, PAYG cashflow benefit

Small businesses will be allowed to claim up to $5,000 as an immediate deduction for any car purchased during the 2012-13 financial year, according to the newly released Federal budget.

While the budget was light on direct support for small businesses, the Government will also deliver a cashflow benefit by reducing pay-as-you-go income tax installments for the upcoming financial year – delivering a cashflow benefit of $700 million.

Confirming the Government’s initiative announced earlier this week, the budget introduces a $5,000 write-off for any business purchasing a car in the 2012-13 year, with the remaining cost depreciated at 30%.

Treasury provides an example of a small business owner who purchases a car for $33,960. Under the existing laws, this owner will receive a $5,094 deduction in the first year of owning that car, as the cost is depreciated at only 15% during the year of purchase.

Under the new scheme, that business owner will receive an immediate write-off of $5,000, increasing the total deduction to $9,344.

However, while the initiative is set to begin in the 2012-13 financial year, this means businesses won’t actually get to claim the benefit until the 2013-14 year. The $5,000 deduction plan will be added alongside initiatives planned under the Government’s response to the Henry Tax Review, including a reduction in the corporate tax rate from 30% to 29%.

As the Government announced last week, this will come at the expense of the Entrepreneurs’ Tax Offset, which provided a 25% discount on payable tax for businesses with revenue under $50,000.

The cost of the $5,000 deduction plan will come to $350 million, while the Government will save $365 million from eliminating the ETO. It argues this offset is poorly targeted and too complex to follow.

“The ETO… may actually deter businesses from growing beyond the size that benefits from the concession,” it warns.

Meanwhile, small businesses will be given assistance through a change in PAYG payment. The Government will reduce the size of payments for those using the GDP adjustment method.

This method means installment amounts will be calculated based on the previous year’s taxable income, multiplied by the GDP figure – this year it will be set at 4%.

During the past two years, that figure has been set at 2% due to the global financial crisis. And this year, it would normally be 8%, but the Government wants SMEs to transition into the full amount.

As a result, the Government expects the reduction in payments will be revenue neutral, as payments will resume at their normal rate next year.

“This adjustment factor reflects nominal GDP growth over the previous two calendar years and is intended to calculate tax installments payable based on expected profit growth,” the Government says.

All small businesses will be eligible for the changes, including sole traders, businesses operating through trusts, partnerships and companies.