Key small business tax concessions introduced in 2015 include a company tax rate cut for small business entities and a tax discount for entities that are not incorporated.
Under the tax law, a “small business entity” is an entity that carries on a business and has an aggregated turnover of less than $2 million in the previous income year, or is likely to have an aggregated turnover in the current income year of less than $2 million.
The rate of tax applicable to a small business entity that is a company has been reduced from 30% (the standard company tax rate) to 28.5%. The 28.5% rate applies for income years commencing on or after 1 July 2015. This means that the company tax rate for small business entities that balance at 30 June is:
- 30% for 2014–2015 and earlier years; and
- 28.5% for 2015–16 and later years.
TIP: The maximum franking credit that can be allocated to a frankable distribution is unchanged at 30%, even for small businesses eligible for the 28.5% tax rate. This means small business companies now have a higher franking credit cap than their tax rate – so take care not to over-frank! Allocating more franking credits than are in the franking account when paying dividends can mean having to pay a franking deficit tax.
To complement the reduction of the company tax rate from 30% to 28.5%, small business entities that are not companies are entitled to a tax discount (by way of a tax offset) for income years commencing on or after 1 July 2015 (ie the 2015–2016 and later income years for entities that balance at 30 June). The offset is available to individuals (ie sole traders) who are small business entities, individuals who are partners in a partnership that is a small business entity and individuals who are beneficiaries of a trust that is a small business entity. Foreign residents may qualify for the offset, and the offset can apply to the foreign business income of Australian residents. The offset is not available to individuals in their capacity as trustees.
The offset amount is equal to 5% of the income tax payable on the portion of an individual’s taxable income that is net small business income. This is subject to a $1,000 cap.