Trick or treat? When SME tax incentives aren’t what they seem

We are constantly hearing messages about the wonderful tax incentives or help for small businesses the government is throwing our way. But how do you tell if it’s just a trick dressed up as a treat?

$20,000 asset write-off

This announcement in the May 2015 budget was one of the most publicised.  On the face of it, it sounds fantastic: an upfront $20,000 deduction! But like all good-looking promises, the devil really is in the detail.  

The first thing to note is that it is only available to businesses with a turnover less than $2 million – so property investors, salary and wage earners and higher turnover businesses all miss out.

The real trick of this one though is you are not actually getting any greater benefit than you were before – you are just getting it sooner. A small business owner who bought a piece of equipment for $10,000, would have previously been able to claim that deduction over say six years but under this change they will get the deduction upfront. Where the business is in a really low profit or loss position there may be no benefit in bringing the deduction forward.  Also, as you’ve written off the asset – you may pay tax on the full proceeds when you ultimately sell it. So, not quite as exciting as it may seem.

ATO Payment Arrangements

It can sometimes be difficult to make a tax payment by the due date. The Australian Tax Office promotes that it is happy to work with you to clear the debt in a reasonable timeframe (depending on your personal situation) in these scenarios. This can sound great on the surface and it can be very tempting to use the ATO as a financer, however, this is not always the treat it may appear.

Entering into a payment arrangement with the Taxation Office will attract interest at quite a high interest rate – currently 9.14%. While there are options to apply to have interest charges remitted, this is never guaranteed and so it is advisable to consider your other financing options first.  Another “trick” to be aware of is each time you enter into a new payment arrangement, the ATO records this on your history and it can potentially be one of the factors that puts you at increased risk for audit.

The Pay As You Go (PAYG) System

In the first year when you start to earn business or investment income, you are not required to pay quarterly instalments of tax on current year profit through the PAYG system. In fact, it is not until you lodge a tax return showing you are in receipt of such income that you need to start making quarterly instalments – this may be almost two years after you started earning the income.  

So while it is a treat to have cash flow assistance in your first year, it is most unpleasant to suddenly be hit with almost two years tax at once! It is therefore important when you start a new venture to put away money to cover your tax debt or voluntarily enter the PAYG system.

Reducing the company tax rate

Another budget announcement this year was the promise of a reduction in the corporate tax rate to 28.5% for small businesses with $2 million in turnover or less from July 1, 2015. This obviously means your company will pay less tax in the current year, however, the benefit can be lost when you start taking dividends out of the company, as you may need to pay the extra 1.5% in “top-up tax” on your dividend.

All these and other measures can most certainly be managed to provide positive outcomes for you and your business but it is important to know that with all treats, there’s a risk of a few tricks, so careful planning is always important!

Maree Caulfield is director of taxation at MGI.