With a general election less than a year away, Treasurer Scott Morrison focused on the feel-good factor in this year’s Federal Budget, presenting an ambitious program of personal tax cuts stretching well into the next decade. For small businesses, there was little that was new to announce.
Still, the cupboard wasn’t entirely bare, so here’s my rundown of the key measures retailers need to know from Budget 2018.
The $20,000 instant asset write-off lives on
It was originally intended to end on 30 June 2016, then it was extended for a year and now it’s been extended again. Truly, the $20,000 instant asset write off is the tax break that refuses to die and, given its popularity with small business owners, that’s very good news indeed.
The instant asset write-off scheme allows small businesses to claim an immediate tax deduction on all capital purchases up to $20,000 per item. If cash flow permits, it’s a great way for retail businesses to buy new capital items to boost their business, such as:
- Cash registers and other POS devices
- Delivery vans
- Store fittings and fixtures
- Computers, laptops and tablets
- In-store security systems
- Accounting software
- Artwork and other store decorative items
In the days before the tax break it was necessary to depreciate the cost of these items over several years. Now, you can claim all the tax back in one hit. A good thing, we can all agree, which no doubt explains why the Treasurer keeps extending it.
Morrison has now announced the instant asset write off will continue for one more year, until 30 June 2019, after which the threshold will fall to a disappointingly ungenerous $1000 (unless the Treasurer chooses to make the $20,000 threshold permanent, which all small businesses would welcome).
If you acquire assets that cost more than $20,000—and hence can’t be immediately deducted—the rules remain the same; they go into a general small business pool and are depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter.
If the balance on the pool drops below $20,000, it can then be immediately deducted.
Remember, although the tax break lives on for one more year, it still makes sense to make capital investments before 30 June this year in order to optimise your tax position this financial year.
Black economy crackdown
If your retail business dabbles in the black economy, possibly by failing to record cash sales to customers or failing to deduct PAYG on your payments to staff, you need to know the government is coming after you.
There were several measures announced in the budget that are directed firmly at those who cheat the system, including:
- A ban on small businesses accepting cash payments for goods and services costing $10,000 or more. Such payments must be made electronically or by cheque from 1 July 2019.
- The government will stop businesses claiming tax deductions for payments to their employees such as wages where they have not withheld PAYG.
Personal tax cuts
The personal tax cuts aren’t directly relevant to the amount of tax you pay as a business (unless you’re a sole trader) but customers paying less tax are customers more likely to buy from your retail business, so it’s worthwhile flagging the highlights of the Treasurer’s income tax cuts package.
A seven-year Personal Income Tax (PIT) Plan will be implemented in three steps, to introduce a low and middle income tax offset, to provide relief from bracket creep and to remove the 37 per cent PIT bracket.
Step 1: Low and middle income tax offset to be introduced
A low and middle income tax offset (LMITO) will be introduced as a non-refundable tax offset of up to $530 per annum to resident low and middle income taxpayers from 2018/19 to 2021/22.
The LMITO will provide a benefit of up to $200 for taxpayers with a taxable income of $37,000 or less.
For taxable incomes between $37,000 and $48,000, the value of the offset will increase at a rate of three cents per dollar to the maximum benefit of $530.
Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530.
For taxpayers with taxable incomes from $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar. For taxpayers earning more than $125,333, no offset will be available.
The LMITO will be received as a lump sum on assessment after an individual lodges their tax return. This means that while the LMITO will apply from 1 July 2018, taxpayers will only enjoy the benefit of the offset after they lodge their 2018/19 tax return (sometime after 1 July 2019).
Taken together, a typical middle income couple stands to be over $1,000 per year better off due to this new tax offset.
Step 2: Relief from bracket creep for middle income taxpayers
Middle income taxpayers will be provided relief from bracket creep in phases.
From 1 July 2018, the top threshold of the 32.5 per cent income tax bracket will be increased from $87,000 to $90,000.
From 1 July 2022, the low income tax offset will be increased from $445 to $645, and the 19 per cent tax bracket will be increased from $37,000 to $41,000 to lock in the benefits of the LMITO in Step 1.
The increased low income tax offset will be withdrawn at a rate of 6.5 cents per dollar for incomes between $37,000 and $41,000, and at a rate of 1.5 cents per dollar for incomes between $41,000 and $66,667.
From 1 July 2022, the top threshold of the 32.5 per cent income tax bracket will be further increased from $90,000 to $120,000.
Step 3: Removing the 37 per cent personal income tax bracket
The 37 per cent tax bracket will be removed altogether from 1 July 2024.
From 1 July 2024, the top threshold of the 32.5 per cent tax bracket will be increased from $120,000 to $200,000.
Taxpayers will pay the top marginal tax rate of 45 per cent for taxable incomes exceeding $200,000, and the 32.5 per cent tax bracket will apply to taxable incomes of $41,001 to $200,000.
According to the Budget papers, someone with annual earnings of $100,000 will be $1125 better off a year in 2024/25. Those on $160,000 will save $3825 a year and those on $200,000 will be $7225 better off.
Mark Chapman is the director of tax communications at H&R Block.
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