As we approach the 2018-19 federal budget on Tuesday 8 May, media and pundits are speculating a common theme. Modest personal tax cuts will likely be the budget centrepiece, but they will be offset by tighter restrictions on tax breaks.
Here’s a roundup of the past month’s published reporting and what the changes would mean for small businesses:
- Treasurer Scott Morrison said late last month “tax relief” was on the way for “middle to lower income Australians”. Terry Hayes, a tax consultant to Thomson Reuters suggests that this may be the $37,000 to $87,000 bracket. The tax rate in this bracket is 32.5%, and it could drop by a few percentage points. Alternatively, the government could raise the $87,000 ceiling to $90,000 (perhaps even $95,000).
- The AFR says any tax cuts will be aimed at incomes of $87,000 and below. They would phase them in over a decade so as not to jeopardise achieving a budget surplus in 2020-21. The Coalition will likely tie personal tax cuts to its stated goal of lowering the corporate tax rate to 25% for all companies by 2026-27. It will rebadge it as a 10-year tax reform package.
- What does this mean for small businesses? A corporate tax cut would be welcome, even if slowly implemented. A personal tax cut would leave small business employees with more take-home pay. This would in turn reduce wage pressure on their employers. However the tangible effect on living standards may be modest. This is because the tax cuts simply correct inflation’s tendency to push people into ever-higher tax brackets.
- The ATO said in February it would crack down on individuals’ work-related expense claims. It argued that bogus tax deductions were depriving the government of $2.5 billion annually. This may be the year we finally see an announcement on a standard tax deduction. Thomson Reuters expects a deduction of about $500 for work-related expenses. However Australian Tax & Super has recommended a higher figure of $2,000.
- What does this mean for small businesses? Employees are accustomed to claiming “other work-related expenses”, such as protective clothing, mobile phone and internet, and tools and equipment. Last year, some 6.7 million taxpayers claimed nearly $1,180 each. So if the budget sets a standard deduction below that amount, some employees might ask employers to cover more work-related expenses.
- It will be no surprise if the government extends the $20,000 instant asset write-off for small businesses for another tax year. In early March, Treasurer Morrison said the instant write-off had achieved the ‘desired effect’: “I like doing things that have the desired effect.” The Council of Small Business Australia and Australian Chamber of Commerce are lobbying for the scheme to continue or even be made permanent.
- What does this mean for small businesses? Almost 100,000 businesses took advantage of the write-off in 2015, the first year it was available, claiming a total of $415 million, according to Treasury data. That was up from the $165 million claimed in write-downs in the year prior. Based on anonymised, aggregated Xero data, we have seen thousands of small businesses claim motor vehicles, plant and equipment, business technology and other tangible assets.
- Treasurer Morrison signalled last month the government will tighten the eligibility and scope of the Research & Development Tax Incentive. This follows an ATO crackdown on businesses “misusing” R&D tax breaks in 2017. The R&D changes are likely to be drawn from six recommendations suggested by a government-appointed panel.
- What does this mean for small businesses? Limitations could include a $2 million cap on the annual cash refund payable for R&D. This would hit tech startups especially hard, as they incur high R&D costs before making any significant money. Other changes could include the introduction of a 1-2% intensity threshold; only companies directing a certain percentage of their total business expenses to R&D would begin to receive a non-refundable tax offset.
- The government may announce new motorways, rail projects and runways. The federal government has already confirmed it will pledge $5 billion towards building a Melbourne airport rail link. Construction on the line will begin by 2020, at a total estimated cost of $10 billion. That is likely the single largest infrastructure investment in the budget. Other projects could also include a resurrected East-West Link in Melbourne and more money for existing works in Brisbane and Sydney.
- What does this mean for small businesses? The gusher of government money could be a boon for small businesses in the construction industry. Construction is the fastest-growing small business sector adopting Xero, tied for first place with professional scientific and technical services.
Other initiatives that could be on the cards include Single Touch GST and even e-invoicing – see ‘‘crazy speculation” about the budget from Xero’s Matthew Prouse.
Xero will be watching the federal budget announcements closely and will provide details, insights and commentary to small businesses and their trusted advisors throughout the following week.
Check out Xero Small Business Insights for unique commentary and reporting on the 2018/19 Federal Budget starting this week.