Eligibility the first check for tax cuts
into their businesses to boost employment and investment.
Before the changes, companies with turnovers below $2 million would have been paying tax at 28.5 per cent and those with turnovers up to $10 million were being hit with the full corporate rate of 30 per cent.
The tax rate will keep falling to 25 per cent in a decade and eventually apply to businesses with turnovers of up to $50 million.
It’s a bonus for small business owners, but the challenge is making sure they can take advantage of these savings.
The first thing to work out is if their company is eligible for this lower rate, Adrian Raftery, associate professor at Deakin Business School, said.
“Although these tax cuts are labelled ‘small business’, they are available only to those who operate via a proprietary limited company,” Mr Raftery said.
“If you are a sole trader or partnership or trade via a family trust, then these tax cuts are not applicable to you.”
But don’t race to change a corporate structure just to take advantage of tax cuts, as this may be considered tax avoidance.
“Other legitimate reasons for switching to a company structure may include the employment of staff, insurance protection of limited liability, as well as conditions of certain contracts,” Mr Raftery said.
Business owners who consider taking added income out of the company, either as a wage or a dividend, should consider that this income will be taxed at the individual taxpayer’s marginal tax rate.
“Any tax savings that the lower company tax rate provides would effectively be lost,” he said.
Another way to benefit is putting business deductions in a personal name.
“If you are deriving a taxable income above $37,000 personally, then look to have business-related expenses such as mobile phone, home office expenses and cars in personal names and get a higher percentage back from the tax office based on your marginal tax rate,” Mr Raftery said.
“The downside is that your personal cash flow will diminish as you are using personal rather than company funds.”