Tax Support For Small Businesses In Australia

by Mary Swire, Tax-News.com, Hong Kong

09 May 2011

The Gillard Government has announced that it will provide Australian small businesses with an instant tax write-off of the first AUD5,000 (USD5,386) of any motor vehicle purchased from 2012-13. This is in recognition of the fact that many small business operators, which make up 96% of Australian companies, are struggling in the present economy.

The government says that motor vehicles are the main capital item for many of Australia's 2.7m small businesses, so it believes that extra tax relief will deliver real benefits by improving cash flows and helping operators to reinvest and grow their businesses.

For example, a tradesman on a 30% marginal tax rate buying a new AUD33,960 vehicle would receive an extra tax benefit of AUD1,275 in the year they purchased the vehicle. The remainder of the purchase value can be transferred into the general small business depreciation pool, which is depreciated at 15% in the first year and 30% in later years.

This measure is estimated to cost AUD350m over the forward estimates and builds on the government's existing tax reforms for small businesses to be introduced in 2012-13 that allow:

• an immediate write-off of all assets valued at under AUD5,000 (up from AUD1,000 presently) estimated to cost AUD1.7bn over the forward estimates;
• a write-off of all other assets (except buildings) in a single depreciation pool at a rate of 30%. Currently, small businesses allocate assets to two different depreciation pools, with two different depreciation rates (30% and 5%); and
• a reduction in company tax rate to 29% for incorporated small businesses.

These tax reforms will be available to all small businesses, including sole traders and businesses operating through trusts, partnerships and companies.

The new small business instant write-off for the first AUD5,000 of any motor vehicle will replace the Entrepreneurs Tax Offset (ETO), which the Australia's Future Tax System Review (AFTS) recommended be abolished because of its poor targeting and high compliance costs. This will save AUD365m over the forward estimates.

AFTS concluded that ETO provided a disincentive for businesses to grow because the benefit available started to decline at AUD50,000 of annual turnover and cut out completely at AUD75,000.

The ETO was also only available to individuals with incomes under AUD70,000 and its poor targeting and complexity meant that 2.3m small businesses missed out on any benefit.

Recommended