Like many governments in their first year, the Federal Government has introduced a tough Budget, which involves increases in tax.
Pain was the buzzword surrounding this Budget particularly for small business. While the government is attempting to return the Budget to surplus its sense of urgency seems to be at the expense of long-needed broader reform to the tax system. Changes to social security for both older Australians and middle income families, the new deficit levy and fuel excise tax increases, along with the proposed scaling back of depreciation instant write-off allowances are all going to hurt small business.
If small business and its customer base are taxed more heavily, the government may end up reducing employment and economic activity and, ironically, the debt burden can become heavier.
The era of entitlement is over and from that perspective, Australia’s 2.3 million SMEs may face a more even playing field. However, as the lion’s share of government largesse in recent years has only indirectly benefited small business, which shoulders the bulk of Australia’s employment growth and cost of doing business, expecting SMEs to ‘share the pain’ is a tough ask.
The impact of the Federal Budget will be felt by many local businesses; some of these measures are outlined below.
Fringe benefits tax
The increase in the Fringe Benefits Tax (FBT) rate from 47% to 49% is in line with the introduction of the deficit levy (tax).
The 2% “Temporary Budget Repair Levy” (a tax) commencing from 1 July 2014 for income over $180,000, is no surprise. What did surprise some of us is that the levy is not that “temporary”: it will be with us for three years.
To prevent high income earners from avoiding the levy using fringe benefits the FBT rate will increase by 2% from 1 April 2015. However, this increase will not be restricted to employees earning more than $180,000 per annum.
If not passed onto the employees, this will result in additional costs to businesses. Businesses should review their salary packaging arrangements with their staff to limit the impact of the additional cost. In relation to employees on packages under $180,000 per annum, it may be beneficial to provide remuneration via salary and allowances rather than fringe benefits which will be taxed at 49%.
For example, where employers provide benefits such as paying for an employee’s private health insurance, the employer could provide additional salary (grossed up at their marginal rate), which would be taxed at a substantially lower rate than 49%.
The pausing of the superannuation guarantee (SG) rate at 9.25% for 2014-15 and 2015-16 has been removed and will now increase to 9.5% from 1 July 2014.
The Government has backpedalled on its previously announced freeze on the proposed SG rate increases and has provided some much needed certainty for employers. From 1 July 2014 the SG will increase to 9.5%, and will then remain at this rate until 1 July 2018.
Rates will then increase by 0.5 percentage points until reaching 12% in 2023.
While the move to reinstate the SG rate increase this year may be seen to be positive, the resulting freeze until 1 July 2018 is two years longer than originally declared in preelection announcements.
A surprise but welcome announcement in the Budget was that the inequitable and punishing excess non-concessional contributions regime has come to an end. While relief on excess concessional contributions has been provided for in previous years, excess non-concessional contributions remained an expensive error to make. Under the current system, any non-concessional contributions made to superannuation that exceed the cap of $150,000 a year (or $450,000 using the three year bring-forward rule for under 65s) are taxed at 46.5% per cent. For example, an extra $1,000 contribution made in the wrong year may have a domino effect on contributions in subsequent years, resulting in individuals facing tax bills in excess of $40,000.
The proposals announced in the Budget will remove this issue. From 1 July 2013, any individuals who exceed the non-concessional contributions cap will be offered the option of withdrawing the excess from superannuation. In addition, any earnings on that excess contribution will also have to be withdrawn and taxed at the individual’s marginal tax rate.
Details on how the earnings rate will be calculated, or how the regime will be administered are yet to be decided. This may be an area of concern as it could possibly lead to complicated calculations being required and higher costs for superannuation funds. Despite this, the proposal will be welcome news for franchisees who contribute to superannuation.
Its proposed scaling back the current $6,500 instant asset write-off for depreciating assets to $1,000 from 1 January 2014.
If enacted this means that franchisees will not be able to write-off as much for depreciating assets, which may affect purchasing decisions for new equipment needed to run the business.
Proposed scratching of the instant initial $5,000 write-off for motor vehicles will once again potentially have an impact on purchasing decisions.
As announced before the Budget, the Government will re-introduce from 1 August 2014 biannual indexation of excise and excise equivalent customs duty for all fuels except aviation and off-road fuels. The Excise Act 1901 will be amended to ensure the amount spent on road infrastructure funding is greater than the net revenue from the reintroduction of indexation on fuel excise and excise equivalent customs duty.
There are no proposed changes to the diesel fuel rebate therefore the rebate will apply to the increased excise amount.
The increase in excise will impact all businesses. It will mean that transporting goods will cost more and travelling for the business will cost more. Businesses may need to assess their pricing structure to ensure that their profit margins remain intact.
A cut in the company tax rate to 28.5% for companies with taxable income below $5 million but a 1.5% per cent tax increase on large companies to fund the Paid Parental Leave scheme.
The Treasurer stated the Government remained committed to its election promise to cut the company tax rate by 1.5 percentage points (to 28.5%) from 1 July 2015, which is encouraging. However, the Budget papers themselves were silent on this reduction, along with the proposed 1.5% levy on big business (companies with taxable income in excess of $5 million) to fund the paid parental leave scheme.
With RSM Bird Cameron you really are… Connected for Success