What the Federal Budget means for SMEs? PART 3

This is the third and final post of a series of articles on the impact of the recent May 2009 Federal Budget on small-medium enterprises (SME) in Australia.

CAPITAL INVESTMENT TAX BREAK (SMALL BUSINESS)

We have been eagerly awaiting for this part of the budget to become tax law. And, this week, this stimulus for small businesses was passed by Parliament.

The ATO will be allowing "small business" to claim an additional tax deduction of 50% on the purchase of any business assets over $1,000.

A "small business" is defined as any business that has a turnover of less than $2 million a year. The usual 30% investment allowance will still apply to businesses with turnovers over $2 million a year.

We will cover the few criterias to be met but let's run thru what the tax break means for small businesses....

OLD WAY without TAX BREAK

A business buys a company car for say, $20,000 and depreciates it over the next 8 years. Using the simple prime cost method, this means $2,500 per year.

In other words, the business gets to claim a tax deduction of $2,500 per year for the next 8 years.

NEW WAY with TAX BREAK

Per the above, the business buys a company car for $20,000 and depreciates it over the next 8 years.

However, in this case, the business gets an upfront tax deduction of $10,000 (50%) in the 1st year AND the depreciation deductions over 8 years.

In other words, the business gets to claim a tax deduction of $12,500 ($10,000 + $2,500) in the 1st year. And, the usual depreciation deduction of $2,500 ever year until Year 8.

Sounds exciting and makes you just want to go forth and spend, doesn't it? 

Well, that's the government's plan. 

But, let's run through the criterias that you have to satisfy....!

CRITERIA

1. Business turnover is less than $2 million per year

2. Asset has to be a purchased between 13 Dec 2008 and 31 Dec 2009

3. Asset has to be an eligible new tangible depreciating asset 

4. Asset has to cost over $1,000

SUMMARY

This is the small business version of the government's "$900 cash tax bonus". 

The tax break is designed to encourage small businesses to spend on capital assets to boost the economy and create jobs.

This may well be the best time to buy that tractor, van or other asset for your business. 

If you have a corporate structure with a tax rate of 30%, the government is effectively GIVING YOU the other 20% as an incentive.

SPECIAL NOTE for GROWTH BUSINESSES

For those businesses who are currently in a rapid growth phase with turnover close to $2 million per year....

If you can afford it (and need it), buy your business assets NOW whilst you are considered a "small business". That way, you can take advantage of the 50% investment allowance.

If you delay, you may only be entitled to the 30% investment allowance of businesses turning over $2 million per year.

END OF PART 3 

OF THE SME BUDGET SERIES

From the AusTax team. 

The #1 provider of Australian tax news on twitter.

What the Federal Budget means for SMEs? PART 2

This is the second of a series of articles on the impact of the recent May 2009 Federal Budget on small-medium enterprises (SME) in Australia.

EMPLOYEE SHARE PLANS

The government introduced a radical change to the tax treatment of employee share & option plans for those earning more than $60,000 per year. 

OLD WAY

Previously, employees were given the choice of either being taxed on the value of the shares when they receive the shares / options or at a later date when the shares / options are actually exercised. 

An upfront election also allowed the employee to receive $1,000 of the allotted shares / options tax-free.

NEW WAY

As at 12 May 2009, for those earning over $60,000, employee share/option plans will become 100% taxable at the moment which they were granted to the employees. The employee will also lose the $1,000 tax-free component.

Providing employees an equity ownership benefit is a relatively "cheap" way for SMEs to retain highly skilled but expensive employees without burdening their actual cashflow.

However, this budget amendment will raise challenges to SMEs trying to retain highly skilled executive staff. They would have to structure their employee incentive plans accordingly.

UPDATE

The government has come under fire from all directions for their decision to implement this change. We will keep everyone updated on the developments.

END OF PART 2 

OF THE SME BUDGET SERIES

CLICK HERE FOR PART 3

From the AusTax team. 

The #1 provider of Australian tax news on twitter.

What the Federal Budget means for SMEs? PART 1

This is the first of a series of articles on the impact of the recent May 2009 Federal Budget on small-medium enterprises (SME) in Australia.

DIVISION 7A - PERSONAL USE OF COMPANY-OWNED ASSETS (CARS, BOATS, HOLIDAY HOMES, ETC)

Division 7A applies where the business is operating under a corporate structure. 

Div 7A basically says that any monies withdrawn by individual owners should be treated as a "deemed dividend" unless it can be proven that it is a "loan" with an appropriate interest rate and documentation. 

The government has indicated that it is thinking of including the personal use of company assets as an infringement of Div 7A as well.

Example

Say, an individual owner uses the company-owned car on the weekends (ie. 2 out of the 7 days of the week). 

The new rule says that 2/7 of the "market value" of the car use should be considered a "payment" to the owner as per Div 7A. 

So, proper documentation needs to be drafted to show that the "personal use" portion of the car is a "loan" and not a dividend payment. This is regardless of the fact that there has not been any real CASH movements.

There will issues with how the "market value" of the use of the assets will be calculated, etc. 

SUMMARY

We will update everyone as soon as the new guidelines are released. 

But, in summary, if you use your company assets for personal purposes, it may now fall under Division 7A. This includes vehicles, housing, and other assets.

This will mean that some SMEs may have to speak to their tax/legal advisers to re-evaluate their business structures.

END OF PART 1 

OF THE SME BUDGET SERIES

CLICK HERE FOR PART 2

From the AusTax team. 

The #1 provider of Australian tax news on twitter.