Budget 2008 – Impact of tax changes on small businesses

There is not much positive tax relief for small businesses in the 2008 Budget, other than confirmation of the tax cuts that were previously announced by the Treasurer, extending the capital gains tax (CGT) small business concessions. No substantive changes were made to superannuation.  

The following are the major tax changes in the Budget that will impact on small businesses.

Marginal tax rates
From July 1 2008, the 30 per cent tax threshold will rise from $30,001 to $34,001; the 40 per cent threshold will rise from $75,001 to $80,001; and the 45 per cent threshold will increase from $150,001 to $180,001.

Extending GGT small business concessions
The Government will increase access to the GST small business concessions through the $2M aggregated turnover test for taxpayers owing an eligible asset (e.g. commercial premises) used in a business by a related entity, and for partners owning an eligible asset used in the business of the partnership. Currently the $2M turnover threshold in the small business entity test does not cover these business structures where the eligible asset is owned by a different entity to the one carrying on the business.
This change will apply from 1 July 2007.

Means testing entrepreneurs’ tax offset income test
Currently there is a 25% entrepreneurs’ tax offset on the income tax liability of small businesses with an annual turnover of $75,000 or less and phasing out where turnover reaches $50,000. The Government will introduce a family income test which will restrict access to the offset for singles from $75,000 and families from $120,000 of adjusted taxable income each year.
This change will apply from 1 July 2008.

Depreciation of in-house computer software
The depreciation period for expenditure on in-house computer software, which is capital in nature, will be increased from 2.5 years to 4 years claimed only on a straight line basis. This will reduce the rate of depreciation from 40% to 25% per year.

Expenditure on in-house computer software is incurred by the taxpayer on acquiring, developing or having someone else develop computer software which is mainly used by the taxpayer (i.e. not for resale). This includes off-the-shelf software acquired for use by the taxpayer.

This change will apply to expenditure incurred on or after 7.30 pm (AEST) on 13 May 2008.
Note that where the taxpayer is a small business entity (i.e. having an aggregated turnover of less than $2M), an immediate deduction can be claimed for software costing less than $1,000 GST inclusive. 

Limiting FBT exemption for work-related items
The fringe benefits tax (FBT) exemption for eligible work-related items such as laptop computers, computer software, protective clothing, mobile phones, briefcases and personal digital assistants will be restricted.

This will have a major impact on small businesses that provide these benefits to employees as part of salary packaging. With the exception of mobile phones, computer software and protective clothing, the current FBT exemption for work-related items is available without the requirement that they be used for work-related purposes. 

The Government has announced that the FBT exemption will only apply where the items are used primarily for work purposes and will be limited to one item of each type per employee per FBT year unless it is a replacement item. The list of FBT exempt work-related items will be extended to deal with technological advancements. The exemption will be apply to all work-related portable electronic devices, including those with multiple functions (e.g. a mobile phone that also has email, internet, diary, photographic and GPS functionality).

The Government has also announced that the double deduction for work-related items is to be abolished. This will now prevent employees from claiming depreciation for the work-related percentage of FBT exempt items.

These changes will apply to expenditure incurred on or after 7.30 pm (AEST) on 13 May 2008. For items purchased before 7.30 pm on 13 May 2008, employees will be denied depreciation for the 2008/09 and later income years.

Removal of FBT exemption for meal cards
The FBT exemption for property consumed on an employer's premises will be amended to remove “meal card arrangements” from the exemption. Under a “meal card” arrangement, an employer pays for an employee’s meals provided by a third party (e.g. café or catering service) located on, or delivered to the employer’s premises as part of a salary sacrifice arrangement.

This measure will not effect subsidised canteens which are provided to all staff and are not part of a salary sacrifice arrangement.

These changes will take effect from 7.30 pm (AEST) on 13 May 2008 so that any supplementation of existing balances will be subject to FBT. Existing balances on meal cards on 13 May 2008 will remain eligible for the FBT exemption, provided they are used by 31 March 2009.

Removal of FBT exemption for expenses paid on jointly held assets
The Government has announced that the FBT law will be amended to remove the salary sacrifice opportunities in relation to jointly held assets such as investment properties. Previously there was an anomaly with the “otherwise deductible” rule in the FBT law which allowed a spouse on a higher income to salary package 100% of the expenses on a jointly held asset (typically an investment property) and therefore effectively also claim the proportion of expenses related to the low income earning spouse.

The change will restore the long held principle that income and deductions from jointly held assets should be allocated according to their legal interest in the asset.

This measure will take effect from 7.30 pm (AEST) on 13 May 2008. Employees who have already entered into salary sacrifice arrangements will be able to rely on such arrangements until 31 March 2009.

Increasing the luxury car tax
The Government will increase the luxury car tax rate from 25% to 33% with effect from 1 July 2008. There will be no change to the luxury car tax threshold currently $57,123 from which the luxury car tax applies.

PAYG annual instalments
The Government has deferred until 1 July 2009 the measure to align PAYG instalments, GST payment and reporting requirements for taxpayers who are voluntarily registered for GST.
The turnover threshold for compulsory GST registration is $75,000 for any period of 12 months. 

No substantive changes to superannuation
Despite concerns that the Government was seeking to make changes to superannuation, there were no amendments to the current contributions regime, tax free status for benefits paid upon reaching age 60, or the payment of transition to retirement pensions. Importantly the Government has also retained the income tax exemption for superannuation fund assets set aside to pay pensions.

Review of tax system
The Government announced the terms of reference for a comprehensive review of the tax system which encompasses both federal and state taxes. Importantly there will be no review of the GST system.  It is hoped that that the Government will continue to simplify the tax system for small businesses and reduce red tape.