Welcome to our yearly summary of how the Federal Budget impacts small businesses. It seems like just yesterday that we were talking about the Budget2020, and there certainly has been some changes for small businesses over the last 12 months.

Alan and Steph sat down this morning to talk about all things budget. Grab some coffee and a snack as there are certainly some key details in this video.

the economy

This year’s budget is certainly all about spending. The Australian Economy has shown it’s resilience throughout the covid period, especially in comparison to other countries.

1 Million jobs have been restored or created since 1 May 2020. Unemployment is now at its lowest rate since 2014.Inflation is at a record low at just 1.1% over the past year.

The Government has invested over $291 billion in support to the Economy since the onset of Covid-19. Gross debt has increased from 28% of GDP before the pandemic to an estimated 40% of GDP in 2025 with all of the increased spending.

We will be paying for this for a long time. We are estimated to stay in deficit until 2028, with net total debt topping out at $980b in 2025. The government remains committed towards driving unemployment down to under 5%.

The aim from the government is ‘foot on the accelerator’ at the moment to continue to stimulate growth in the economy.

for small businesses - tax

Company Income Tax Rate Cut

The company tax rates are dropping for those businesses with a turnover of less than $50million. The new rate from 1st July 2021 is 25%. Happy days, less tax to pay from 1st July 2021! The rate is currently 26% and last year was 27.5%

Note, this tax rate is only for businesses who trade in Australia, not those Companies who just have passive investments.

Instant Asset Write-off

The Instant Asset Write Off is extended until 30 June 2023. This means that for any assets you purchase now (as long as your turnover is under $5b) until 30th June 2023, rather than claiming a tax deduction over a number of years (known as the effective life of the asset) you can claim the deduction in the tax year you purchase the asset.

Now the important thing is.....you have to be making PROFIT in order to pay tax. This isn't a rebate, it's just a tax deduction. AND don't forget you also need to be able to fund the purchase of this asset.

So win win for those of you with great profits who want to continue to invest in assets (ie robots) to help grow your business.

One other thing to note with this rule that a lot of people are forgetting about is that when you sell the asset, the proceeds from that sale are taxable income as you have claimed the full cost as a tax deduction already. Normally when you are claiming the tax deduction over a number of years you still have what’s known as a cost base to reduce the gain on sale.

Media certainly talk a lot about being able to write off a ute for a tradie, which is all well and good if you are in need of a new ute, but this is really designed to help businesses bring forward those bigger equipment purchases that will help drive efficiencies in business. We’ve seen supply chain hold ups over the last 12 months so this is a great opportunity for businesses to look at what they can be doing to solve some of those problems.

Loss carry-back extension

The loss carry-back is also being extended until 30 June 2023. This goes hand in hand with the Instant Asset Write off, given the potential for large asset purchases to put a Company into a taxable loss position when the entire amount is claimed in one year.

This is also available for those with a turnover of less than $5 billion, and is only available for Companies. So if you trade as a Trust, Partnership or Sole Trader this rule doesn’t apply to you.

In practical terms, let’s say you made a profit in the 2018-19 Financial Year, but this year you have purchased a new piece of equipment that cost $400,000 which means you have made a loss of $200,000. Normally the loss you make this year would carry-forward and offset the profit you make next year. Instead under these new rules you can carry-back the loss and claim it against profits already paid in 2018-19 giving you a refund of that tax paid now, rather than waiting to reduce next year's tax bill.

It’s important to note this is optional. If you don’t use the carry-back you can still allocate the loss against future years profit.

Intangible Asset Tax Write-offs

Some changes to Intangible Assets......(patents, in-house software etc)

The current rules are quite outdated, and really don't keep pace with what happens in reality, especially with software. At the moment if you acquired a patent, you would need to claim the cost of that patent over 20 years (yep a long time). Under the new rules, you will be able to self-assess the actual effective life of that patent and instead claim the cost over those years. Same with in-house software. If it's going to be obsolete in 2 years then you now claim over those 2 years. Note this doesn't come into effect until 1 July 2023

Video Game Offset

Still some consultation to be done with Industry on this one, but the government want to stimulate the gaming industry in Australia by providing a 30% Digital Games Tax Offset. This will be available for Australian and foreign resident companies who have a permanent establishment in Australia and who have a minimum $500k spend. Note, games with gambling elements won't qualify for this. Start date is set for 1 July 2022.

Some fun facts :

• The global game development market is valued at $250 billion, and currently 90% of the revenue generated by Australian game developers comes from export revenue.
• The aim here is to attract investors/businesses to setup studios here
• South Australia already offer a 10% rebate which puts them at the forefront of the Industry

Support for Small Brewers and Distillers

I'm sure everyone will like this title.....Bucks for Booze....

Small Brewers & Distillers are set to receive up to an extra $250,000 in tax breaks. This starts on 1 July 2021. From this date remission will be granted on the FULL amount of excise paid up to $350,000 per Financial Year. At the moment the cap is $100,000 so this is a nice improvement.

We like to think at Growthwise we do our part in drinking enough Gin to support all the small distillers , but I’m sure they will all appreciate this offset as well!

Patent Box

To encourage domestic innovation in Australian Medical and Biotechnologies a new ‘patent box tax’ has been flagged. There is a tonne of Industry consultation to be done here before final legislation is known and the start date for this new tax is set at 1 July 2022.

Effectively income earned due to a patent in these areas will be taxed at 17% rather than the current normal tax rates. There is also expected to be consultation on whether something like this would work for the clean energy sector as well.

for small businesses - incentives for employment

Boosting Apprenticeships

This has been extended again. Any apprentice hired up to 31 March 2022 will qualify for the 50% rebate of wages paid for 12 months. So if you employ an apprentice in January 2022 you will still be eligible to receive 50% rebate back on wages paid to them up to a maximum of $7,000 per Quarter. This is expected to support an additional 100,000 apprentices on top of the 170,000 already supported.

JobTrainer

Has been extended December 2022 and is expected to benefit an additional 163,000 places. The aim is to support training in digital skills as well as critical industries like aged care and will help thousands of job seekers, school leavers and young people.

In addition to JobTrainer wage subsidies of up to $10,000 will be available to encourage businesses to employ disadvantaged people. This applies to people on job active, Transition to Work and ParentsNext payments and is administered via employment agencies.

Changes to ESS

For those people who provide or are part of an Employee Share Scheme (where the taxing point was deferred), the government has taken steps to remove the ‘cessation of employment’ taxing point.

What this means in practice is, for an employee who leaves their job, they no longer get taxed when they leave their employer. Now, the taxing point will be:

(a) in the case of shares, when there is no risk of forfeiture and no restrictions on disposal;

(b) in the case of options, when the employee exercises the option and there is no risk of forfeiting the resulting share and no restriction on disposal; and (c) the maximum period of deferral of 15 years

This measure aims to help Australian companies to engage and retain the talent they need to compete on a global stage.

Don’t forget JobMaker is also still in play at the moment.

spending in general - for small businesses

Deregulation Package

The government has made a series of announcements to make it easier for businesses to employ people & reduce the regulatory burden for businesses dealing with government.

The exciting part of this is the new technology earmarked to make it easier for small businesses to comply with modern awards.

No one likes interpreting employee awards (let's face it they are soooooooo complex), $10million of this package will go towards developing technology to help employers interpret & comply with modern awards. There will be an API for Fair Work so it's easier for software products to stay up to date with this.

E-Invoicing

An additional $15.3 million is allocated to help push e-invoicing for all businesses, including working with EFTPOS, Visa, Mastercard etc. The idea here is to reduce the red tape and time taken to process invoices, thereby reducing the time it takes for people to get paid. Xero are all over it and already have e-invoicing in place now.

for smsf….well actually just all about super

It certainly was extremely quiet on the SMSF front this year. The only notable announcement last night was in relation to the residency test for SMSF Trustees. Currently, you can only be absent from Australia for 2 years if you wish to retain an SMSF, i.e. you need to pass the “Management & Control” test and you can’t do that if you are away from Australia for more than 2 years. The proposed change is to increase this to 5 years and to also remove the active member test as well.

So whilst that was the only real announcement for SMSF’s there are a number of changes to superannuation in general.

Super Guarantee Rate Change

EMPLOYERS TAKE NOTE

From 1st July the amount of Super you need to contribute for employees (including yourselves) will increase from 9.5% of salary and wages paid to 10% of salary and wages. If your employment contracts are written as wages + super, you will be adding an extra 0.5% to your overall employees costs for the year. Note the super amount is set to go up 0.5% every year until it reaches 12% in 2026.

Scrapping of the $450 threshold amount

At the moment if you earn less than $450 in a month as an employee your employer isn’t required to contribute to super for you. That threshold is being scrapped, which means everyone over 18 will now be paid Super on every dollar they earn. We still have another 12 months before this comes into effect with a start date of 1 July 2022

Superannuation Contributions Increase

Great news for those of you who like to maximise Super Contributions each year (the tax deductible type). From 1st July 2021 you can now contribute $27,500 each year into super, up from the existing cap of $25,000.

The non concessional contribution cap (these aren’t a tax deduction when you put the money into super) has increased from $100,000 to $110,000 starting on the 1st July 2021 as well.

This increase also helps for those of you who are trying to maximise your superannuation deduction in a year for purchasing business property in super for example. From 2019, any amounts not contributed up to the cap in one year can be ‘rolled forward’ to the next year. So if in 2019 & 2020 & 2021 you only contributed $10,000 into super each year, you could potentially contribute $72,500 into super in the 2022 Financial Year and claim it as a Tax Deduction (ie $15,000 for each of the 3 years prior + the new $27,500 limit for the 2022 year). Note this is due to finish in the 2024 Financial Year and you also need to have a balance of less than $500,000 in super to be able to do this.

Works Test

Another simplification for Super….If you are aged between 67 & 74 at the moment you need to work 40 hours over 30 consecutive days before you can contribute to super. This is being scrapped and everyone up to age 74 can now contribute to super from 1 July 2022. Note, employer contributions meet this definition. If you want to make tax deductible contributions personally, you still need to pass the 40 hours or work within 30 days.

Downsizer Contributions

If you are aged over 60 and you sell your family home, you can contribute $300,000 per person into super. This will start from 1 July 2022. This is currently the case if you are over 65.

Tax-Free Super Limit

Currently you can have $1.6 million in Super which you can withdraw tax free when you reach age 60. You can of course have more than this in Super, you just get taxed on the balance above $1.6 million This limit is now increasing to $1.7 million from 1st July 2021.

First Home Buyer Super Saver Scheme

This scheme was designed to help people save for a home deposit. You can currently contribute $15,000 per year towards this saving goal. Up until now the maximum amount you could do under this scheme was $30,000. This has now been increased to $50,000.

for individuals

Not too many exciting things (or changes for Individuals) as most of these already occurred in last year's budget.

Personal Income Tax Cuts

While Companies get a nice tax cut back to 25% from 1st July, Individuals aren’t so lucky this year. Tax Rates will be the same as they were last year. This is because the Individual Tax Cuts that were due this year were actually brought forward last year.

Stage 3 of the tax cuts are due to commence on 1 July 2024. This is still a while off, but assuming nothing changes the following will apply

Low & Middle Income Tax Offset to continue

Low and middle income tax offset (known as ‘lamington’) is set to remain for another 12 months. The rebate is up to $1,080 for singles & $2,160 for couples. This isn’t new as we’ve had this for the last 12 months as well.

If you earn less than $37,000 you get $255 in your tax return as a refund. This goes up if you earn between $37,000 - $48,000 by 7.5 cents for every dollar earned over $37,000. Between $48,000 - $90,000 in taxable income you get $1,080 offset in your tax return. Between $90,000 - $126,000 this reduces by 3 cents for every dollar earned over $90,000

Just to throw another acronym into the mix we also have the LITO or Low Income Tax Offset for the 2022 year, which is also unchanged from 2021. If you earn less than $37,500 you receive the maximum $700 offset. This reduces back to nil when you get to $66,668 or above in taxable income.

The easiest way to work out what you are eligible for at the moment is to look at the tax cut estimator

Increase in Medicare levy low-income thresholds

While we are running hot on tax changes the Medicare levy low-income thresholds have been updated. You won’t pay Medicare Levy if your taxable income is lower than :

The threshold for singles will be increased from $22,801 to $23,226.

The family threshold will be increased from $38,474 to $39,167. The threshold for single seniors and pensioners will be increased from $36,056 to $36,705. The family threshold for seniors and pensioners will be increased from $50,191 to $51,094. For each dependent child or student, the family income thresholds increase by a further $3,597, up from the previous amount of $3,533.

Self-Education Costs

Nothing too exciting here, just a simplification of claiming a tax deduction for self-education expenses. At the moment if you pay for a course that is connected to your current job, the 1st $250 of that cost isn’t tax deductible, only the remaining cost is. The new rules mean the total cost will now be deductible. Start date is still unknown as this doesn't come into play until the 1st income year after the date of Royal Assent.

Residency Rules

Possibly less of an issue with limited overseas travel at the moment, but the individual residency rules are also getting an overhaul. If you are in Australia for more than 183 days in any income year you will be taxed as an Australian resident. This will be known as the primary test. If you don’t meet this test there are a bunch of other secondary tests that depend on a combination of physical presence and measurable, objective criteria.

This is important as not only do the tax rates change if you are a resident vs non-resident, but residents are also assessed on world-wide income, not just income they earn in Australia. There are also implications for people classified as non-residents for super and capital gains on properties. The start date for this is 1 July following Royal Assent.

ChildCare Subsidy

An additional $1.7 billion has been allocated to the childcare sector. Previously, for any children after your first child, the childcare subsidy was capped at $10,560 if your family income was over $189,390. This cap is now being removed starting 1 July 2022.

The subsidy amount is also being increased by 30% for any children after your first child, up to a maximum subsidy rate of 95%. This subsidy increase will start on 11 July 2022.

Also note that these measures only apply for children aged 5 years and under.

what next

As usual all of these need to be legislated. We also have our live q&a today at 5pm (March 12th). Don’t forget to register.

Stay tuned to our Facebook page or Ninja News for updates.