Head start for small business


Budget Review 2010-11 Index

Budget 2010–11: Taxation

Company tax reduction: Head start for small business

Bernard Pulle and Stephen Barber

Introduction

The Australian Government announced in its response to the Australia’s future tax system review (Henry Tax Review) that one of the consequences of the proposal to introduce a Resource Super Profits Tax (RSPT) from 1 July 2012 was that it was possible to cut the company tax rate.[1] In the 2010–11 Budget, the government has announced that the current company tax rate of 30 per cent will be cut to 29 per cent in 2013–14 and 28 per cent in 2014–15.[2] In addition, small business companies will be given a head start by having access to the reduced 28 per cent company tax rate from the 2012–13 income year.[3]

The government also announced on Budget night that small businesses will enjoy an instant write-off of assets which cost less than $5000, compared with the current ability to write-off assets costing less than $1000.[4] In addition, small businesses will also be able to depreciate all other assets (other than buildings) in a single pool at a rate of 30 per cent, compared with the existing two depreciation pools which are depreciated at 30 per cent and 5 per cent depending on the life of the asset.[5] These measures will take effect from the 2012–13 income year.

The table below sets out the revenue consequences of these proposals as indicated in Budget Paper No. 2: 2010–11.

Revenue ($m)

Measure

2009–10

2010–11

2011–12

2012–13

2013–14

Lowering the company tax rate

-

-

-

-300.0

-2000.0

Early start to the reduction in the company tax rate

-

-

-50.0

-300.0

-200.0

Small business instant asset write-off and simplified pooling

-

-

-

-

-1030.0

Source: Budget Paper No. 2: 2010–11, op. cit., pages 39, 43 and 46. Note: The $300 million in 2012–13 for the lowering of the company tax rate and the $50 million in 2011–12 for the head start in the reduction of the company tax rate were not explained (these measures do not take effect until the following financial years).

Reduction in company tax rate

Recommendation 27 of the Henry Tax Review’s report to the Treasurer proposed that the company tax rate be reduced to 25 per cent over the short to medium term, subject to economic and fiscal circumstances.[6] The report illustrated that Australia’s company tax rate of 30 per cent is high relative to other comparably sized OECD countries, and indicated that the rate should be brought down to the average rate for small to medium OECD economies, which is currently around 25 per cent (see the chart below).

Restoring Australia's relative company income tax rate ranking

Source: Henry et. al., Australia’s future tax system: report to the Treasurer, op. cit, p. 167.

The Government’s first response to the recommendations in the Henry Tax Review on 2 May 2010 proposed the progressive reduction of the company tax rate outlined in the Budget. As noted by the Prime Minister and the Treasurer in a joint media release titled Stronger, Fairer, Simpler: A tax plan for our future on 2 May 2010, the initial response of the Government—including the lowering of the company tax rate—is the first step in a 10 year agenda.[7]

Early start in the reduction of company tax for small business companies and less red tape for small business

As indicated above, small business companies, relative to companies generally, will have the current company tax rate of 30 per cent reduced by 2 percentage points from the income year 2012–13.

The Government estimates that the loss to revenue from the approximately 720 000 small business companies involved will be $300 million in 2012–13 and $200 million in 2013–14.

The Government expects that the early start to the reduction in the company tax rate will enable these small business companies to reinvest more of their profits back into the company to expand and grow their business. Thus, the Government expects that savings from the reduction in the tax rate in the year 2012–13 will be reinvested to produce higher profits by these small business companies in the year 2013–14. Higher profits means more tax collected and so the loss to revenue will not be as large in 2013–14 as in 2012–13.[8]

The Government has also agreed to grant approximately 2.4 million small businesses the instant asset write-off tax concession from 1 July 2012. However, a loss to revenue is not recorded in the Budget for this measure until 2013–14.


[1].    K Rudd (Prime Minister) and W Swan (Treasurer), Stronger, fairer, simpler: a tax plan for our future, media release, no. 028, 2 May 2010, viewed 18 May 2010, http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/028.htm&pageID=003&min=wms&Year=&DocType=0

[2].    The budget figures in this brief have been taken from the following document unless otherwise sourced: Australian Government, Budget measures: budget paper no. 2: 2010–11, Commonwealth of Australia, Canberra, 2010, pp. 39, 43 and 46, viewed 18 May 2010, http://www.aph.gov.au/budget/2010-11/content/bp2/download/bp2.pdf

[3].    A small business company is an incorporated company with a turnover of less than $2 million per annum.

[4].    A small business is a business entity with less than $2 million in aggregated turnover per annum. See: Australian Taxation Office, ‘Guide to concessions for small business entities’, ATO website, viewed 19 May 2010, http://www.ato.gov.au/businesses/content.asp?doc=/content/00146971.htm&page=18&H18

[5].    These depreciation rates are halved in the year of purchase.

[6].    K Henry (Chair), J Harmer, J Piggott, H Ridout, and G Smith, ‘Part two: detailed analysis’, Australia’s future tax system: report to the Treasurer, vol. 1, Commonwealth of Australia, Canberra, December 2009, p. 167, viewed 17 May 2010, http://taxreview.treasury.gov.au/content/downloads/final_report_part_1/00_AFTS_final_report_consolidated.pdf

[7].    K Rudd (Prime Minister) and W Swan (Treasurer), Stronger, fairer, simpler: a tax plan for our future, media release, 2 May 2010, viewed 17 May 2010, http://www.futuretax.gov.au/documents/attachments/100502_stronger_fairer_simpler_a_tax_plan_for_our_future.pdf 

[8].    Australian Government, Fact sheet: early start to company tax rate cut for small business companies, Commonwealth of Australia, 2010, viewed 19 May 2010, http://www.futuretax.gov.au/documents/attachments/2_Fact_sheet_Early_start_to_company_tax_rate_cut_for_small_business.pdf

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