The Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (the Bill) has been introduced in the House of Representatives. It proposes to:

  • increase the small business entity turnover to $10 million from 1 July 2016;
  • increase the unincorporated small business tax discount from 5% to 16% over a 10-year period; and
  • increase the turnover threshold to qualify for the lower company tax rate and lower the company tax rate on a schedule over 11 income years, reaching a unified company tax rate of 25% in 2026–2027.

The proposal was announced as part of the 2016–2017 Federal Budget.

Corporate tax rate reduction

The Bill proposes to amend the Income Tax Rates Act 1986 to reduce the corporate tax rate to 27.5% for the 2016–2017 income year for corporate tax entities that are small business entities; that is, corporate tax entities that carry on a business and have an aggregated turnover of less than $10 million. This lower corporate tax rate would progressively be extended to all corporate tax entities by the 2023–2024 income year. The corporate tax rate would then be cut to:

  • 27% for the 2024–2025 income year;
  • 26% for the 2025–2026 income year; and
  • 25% for the 2026–2027 income year and later income years.

The 27.5% corporate tax rate would progressively be extended to all corporate tax entities by the 2023–2024 income year.

To achieve the progressive extension of the 27.5% corporate tax rate to all corporate tax entities by the 2023–2024 income year, the 27.5% corporate tax would apply to a base rate entity from the 2017–2018 income year. A corporate tax entity would be a base rate entity if it carried on a business and had an aggregated turnover for the 2017–2018 income year of less than $25 million. The aggregated turnover threshold that would apply to determine whether a corporate tax entity was a base rate entity that qualified for the lower corporate tax rate would be raised annually, so that:

  • in 2018–19, the annual aggregated turnover threshold would be $50 million;
  • in 2019–2020, the annual aggregated turnover threshold would be $100 million;
  • in 2020–2021, the annual aggregated turnover threshold would be $250 million;
  • in 2021–2022, the annual aggregated turnover threshold would be $500 million;
  • in 2022–2023, the annual aggregated turnover threshold would be $1 billion.

In the 2023–2024 income year, the aggregated turnover threshold test to qualify for the lower corporate tax rate would be removed. The corporate tax rate in that income year would therefore be 27.5% for all corporate tax entities. The corporate tax rate would then be further reduced in stages: to 27% for the 2024–2025 income year, 26% for the 2025–2026 income year and 25% for the 2026–2027 income year and later years.

In the period from the 2016–2017 income year until the 2022–2023 income year, the corporate tax rate would remain at 30% for companies that have an aggregated turnover equal to or exceeding the threshold for the income year.

Franking

The maximum franking credit that could be allocated to a frankable distribution paid by a corporate tax entity would be based on a tax rate of 27.5%. However, if the entity's aggregated turnover for the prior income year was equal to or exceeded the aggregated turnover threshold for the current income year, then the maximum franking credit that could be allocated to a frankable distribution paid by the entity would be based on the headline corporate tax rate of 30%.

Carry forward tax offset rules

Sections 65-30 and 65-35 of the Income Tax Assessment Act 1997 (ITAA 1997) relate to the operation of the tax offset carry-forward rules. Consequential amendments would be made in particular income years to ss 65-30 and 65-35 to reflect the staged reduction in the corporate tax rate.

NFP companies

As the corporate tax rate for companies that are small business entities would be reduced to 27.5%, the shade-in limit for non-profit companies that are small business entities would be reduced to $832 for the 2016–2017 income year.

Life insurance companies

The rate of tax paid by life insurance companies on the ordinary component of the company's taxable income would be reduced to 27.5% in the 2023–2024 income year (when the corporate tax rate would become aligned for all companies). Consistent with the treatment of other companies, the rate would then be cut: to 27% for the 2024–2025 income year, 26% for the 2025–2026 income year and 25% for the 2026–2027 income year and subsequent income years.

Date of effect

The corporate tax rate will be reduced from the 2016–2017 income year.

SME entity threshold increase

The Bill also proposes to amend the definition of "small business entity" in s 328 of ITAA 1997 to increase the aggregated turnover threshold for eligibility as a small business entity from $2 million to $10 million. The aggregated turnover threshold for access to the small business income tax offset would be limited to $5 million, and the current aggregated turnover threshold of $2 million would be retained for the small business CGT concessions. The proposal was announced as part of the 2016–2017 Federal Budget.

Small business entities with aggregated turnover of less than $10 million would be able to access a number of small business tax concessions, including:

  • immediate deductibility for small business start-up expenses;
  • simpler depreciation rules;
  • simplified trading stock rules;
  • rollover for restructures of small businesses;
  • immediate deductions for certain prepaid business expenses;
  • accounting for GST on a cash basis;
  • annual apportionment of input tax credits for acquisitions and importations that are partly creditable;
  • paying GST by quarterly instalments; and
  • the FBT car parking exemption.

The Bill would also amend Subdiv 328-F to create a different aggregated turnover threshold of $5 million for the purposes of the small business income tax offset. It proposes to achieve this by modifying the meaning of "small business entity". For the purposes of Subdiv 328-F, and therefore the small business income tax offset, an entity would work out whether it was a small business entity for the income year as if each reference in s 328-110 (which imposes the aggregated turnover threshold) to $10 million were a reference to $5 million.

Small business CGT concessions

The Bill proposes to amend Div 152 to retain the current aggregated turnover threshold of $2 million for the purposes of the small business CGT concessions contained in that Division. It achieves this by replacing references to "small business entity" with the new defined term "CGT small business entity". An entity will be a CGT small business entity for an income year if that entity is a small business entity for the income year, and would still be a small business entity for the income year if each reference in subs 328-110(1)(b) (which imposes the aggregated turnover threshold) to $10 million were a reference to $2 million.

Date of effect

The new thresholds would apply from the 2016–2017 income year. For the FBT car parking exemption, the new threshold would apply from the FBT year commencing on 1 April 2017.

Tax discount increase for unincorporated small businesses

The Bill also proposes to amend ITAA 1997 to increase the small business income tax offset to 16% of net small business income by the 2026–2027 income year. The proposal was announced as part of the 2016–2017 Federal Budget. In the 2025–2026 income year and earlier income years, lower rates of offset would apply as follows:

  • For the 2016–2017 to 2023–2024 income years the offset would be 8% of net small business income.
  • For the 2024–2025 income year the offset would be 10% of net small business income.
  • For the 2025–2026 income year the offset would be 13% of net small business income.

The offset, introduced in the 2015–2016 income year, entitles individuals who are small business entities, or who are liable to pay income tax on a share of the income of a small business entity, to a tax offset equal to 5% of their basic income tax liability that relates to their total net small business income, capped at $1,000. Although the proposed increases in the offset would increase the percentage of offset an eligible individual may claim, the offset amount would remain capped at $1,000.

Date of effect

The first increase to the offset would commence on 1 July 2016 and apply from the 2016–2017 income year.

Source: Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, before the House of Representatives as at 14 September 2016, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5684%20Recstruct%3Abillhome.