Australian Parliament Passes Legislation To Bring Forward Scheduled Tax Relief for Small and Medium Businesses

Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018 was passed by both houses of the Australian parliament. The Bill accelerates the reduction of income tax rates for incorporated and unincorporated small businesses.

Small and medium business entities

The Bill provides tax rate changes for two different small and medium business entities:

  1. The Bill amends the Enterprise Tax Plan Act to accelerate the reduction of the corporate tax rate for corporate tax entities that are base rate entities — that is, corporate tax entities that derive no more than 80% of their income in passive forms and have an aggregated turnover of less than $50 million. The reduction rate for this entity aims to increase the incentive for companies to undertake new investment.
     
  2. The Bill addressed the increased income tax offsets for unincorporated small businesses entity. To be categorized as this entity, the small business must have an aggregated turnover less than AUD 5 million for the income year. The policy is expected to minimise tax distortions between the different entity types through which small businesses may be run. This was intended to help provide small businesses that are run through unincorporated entities with an increase in their cash flow.

Key features of the changes

The tax rates for incorporated small businesses change as follows:

As legislated

New Law

For the income years 2018-19 to 2023-24, the corporate tax rate for base rate entities with an aggregated turnover of less than $50 million will be 27.5%. The corporate tax rate will then be

  • 27% for the 2024-25 income year;
  • 26% for the 2025-26 income year; and
  • 25% for the 2026-27 income year and later income years.

The corporate tax rate for base rate entities will be:

  • 27.5% for the 2018-19 and 2019-20 income years (no change to the current law);
  • 26% for the 2020-21 income year; and
  • 25% for the 2021-22 income year and later income years.

 

As a related measure, similar timing changes will apply to the roll out of the 16% tax discount for unincorporated businesses. These are the following comparison of key features between current and new law:

As legislated

New Law

For the 2018-19 to 2023-24 income years, the small business income tax offset rate will be 8%.

The small business income tax offset rate will then increase to:

  • 10% for the 2024-25 income year;
  • 13% for the 2025-26 income year; and
  • 16% for the 2026-27 income year.

The small business income tax offset rate will be:

  • 8% for the 2018-19 and 2019-20 income years (no change to the current law);
  • 13% for the 2020-21 income year; and
  • 16% for the 2021-22 income year and later income years.

Due to these amendments, the Australian government also makes consequential amendments to various headings of The Act to reflect the accelerated implementation of the tax rate reductions and tax offset increases.

Sources: Australian Parliament, Parliament of Australia

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