Budget 2014: SME owners could use loopholes to avoid debt tax

Owners of small and medium-sized businesses are likely to defer salary payments to themselves or bring forward payments in order to avoid the government’s proposed 2% debt tax on high income earners, reports Fairfax.

The government confirmed its temporary “debt levy” on those who earn more than $180,000 a year in this week’s budget. The tax will hit the top income tax bracket at a rate of 2%, a move which is expected to affect 650,000 Australian taxpayers.

The changes will come into effect on July 1 and the government expects to raise $3.1 billion over a four-year period. In his budget speech, Treasurer Joe Hockey said everyone needs to pitch-in in order to bring the budget back to surplus.

“Tonight we are asking higher-income earners to help repair the budget,” he said. “It is only fair that everyone makes a contribution.”

Lance Cunningham, national tax director at BDO Accounting, told SmartCompany financial planning strategies to reduce assessable income will be attractive to business owners affected by the debt levy.

“What they [small business owners] would probably be doing is actually bringing that income forward or also deferring tax deductions because the levy comes in on July 1,” he says. “Usually in other years the inclination is to defer the income and bring incentives forward.”

Cunningham says because of the changes in the federal budget, the tax incentives this year are effectively reversed.

“So you might have an incentive to bring the income forward to be taxed at the lower rate rather than the higher rate or to get the tax deductions next year rather than this year,” he says.

Cunningham says examples of differing expenses could be revaluing stock, delaying writing off bad debts until after June 30 or considering giving gifts to recipients in the new financial year.

According to Cunningham, some business owners will be tempted to consider salary packaging or arranging for their income to be moved into a company structure. However, he says business owners need to be careful.

“People need to be getting the proper advice. This sort of thing can sound very attractive up front but if you don’t do it the right way or for the right reasons you can get stuck,” he says.