- Tax reduction opportunities for small business
An article in the 4 July 2017 edition of The Australian has caused a bit of a stir by suggesting eligibility for small business tax cuts for a broader range of companies than was previously thought to be the case.
However a prompt response from Minister O’Dwyer appears to pour cold water on The Australian’s analysis. Despite this, it still serves as a good reminder of the very real tax reduction opportunities that exist for genuine small businesses, possibly even on returns that have already been lodged.
In the 2016 financial year, small businesses had their tax rate reduced from 30% to 28.5%. In the 2017 financial year, it has been further reduced to 27.5%. Whilst the percentage change may appear small, a company with taxable income of $1m in 2017 could potentially save $25,000 by applying a 27.5% tax rate compared to a 30% rate.
There are two main tests to qualify for a reduced corporate tax rate — turnover and whether or not the entity in question is carrying on a business.
Broadly speaking the turnover threshold is quite straightforward. For financial year 2017 businesses (including connected or affiliated entities) with turnover of less than $10 million will meet this test. This threshold has been raised from the $2 million that applied in 2016.
Whether or not an entity is carrying on a business is a little more complex and based on a number of court decisions and ATO rulings. Minister O’Dwyer’s press release from 4 July 2017 stated that the Small Business tax rate was not intended to be available to “passive investment companies”. However, there are numerous rulings and cases that suggest that a company that invests in shares or property may be carrying on a business if the purpose of the activity is to make a profit for its shareholders and there is a substantial degree of system, scale or commerciality about the activity.
Some practical examples of carrying on a business in contrast to a passive investor may include:
- A company with multiple properties or investments rather than a single investment property.
- A company that employs professional management, finance or commercial personnel, or advisors.
- A company that actively manages its portfolio, including buying or selling properties or shares, or actively improves or develops property, rather than a passive long-term holder of a stable portfolio.
There are some real opportunities for small businesses to reduce their tax bill, but it’s important to be clear about whether or not your business is eligible.