Budget brief: are there any surprises for small business, including sole traders?

This means the mooted 1.5% cut for small businesses won’t make it to sole traders. AAP Image/Dan Himbrechts

The Conversation’s Budget briefs series aims to answer reader questions about the 2015 federal budget. Thanks to reader Emma Watt for this question.

The 2015-16 federal budget has promised A$5.5 billion for small business and a surprise 5% tax discount, up to $1000, for unincorporated small businesses.

And all businesses – including sole traders – with a yearly turnover of $2 million or less will be able to write off up to $20,000 per item.

As the Budget 2015 website explains:

This $20,000 limit applies to each individual item. Small businesses can apply this $20,000 rule to as many individual items as they wish. These arrangements start from Budget night and continue until the end of June 2017.

We had already been told that, should this budget pass the Senate, business registration red tape will be cut, new rules will make it possible to claim tax deductions sooner on the cost of launching a new business and it will be easier for small firms to crowd-source investment capital.

All that is on top of the promised 1.5% company tax cut for for small business.

Prior to budget night, not all small business owners were in a position to take advantage of these changes but one of the Budget’s few surprises seeks to remedy that.

A big deal for small business

Around two-thirds of small businesses, and most sole traders, do not bother operating as separate company structure. This means the mooted 1.5% cut for small businesses won’t make it to sole traders, as the ATO treats their income the same way it does income tax for other taxpayers.

To partially offset this, the government will provide a 5% tax discount, up to $1000, for unincorporated small businesses (a common legal structure for many tradies).

This 5% tax discount has come as something of a surprise.

It goes some way to addressing a fundamental problem. The Tax White Paper, released earlier this year, noted the odd situation that similar activities can attract very different tax outcomes depending on the legal structure surrounding them. Trying to level the tax paid for the same work that occurs under different legal structures makes eminent sense.

To further spur investment and jobs growth within the small business sector, all businesses – including sole traders – with a yearly turnover of $2 million or less will be able to write off up to $20,000 per item.

As the Treasurer put it:

… from 7:30pm tonight, small business can claim an immediate tax deduction for each and every item they purchase up to $20,000. From tonight, it can be instantly written off to reduce your tax liability. And this will benefit the 96% of Australian businesses — more than 2 million of them — that have a turnover of less than $2 million a year.

This too is a surprise, as leaks leading up to the budget suggested that the figure would be half this amount.

Treasurer Joe Hockey’s earlier announcement of new policies aimed at chasing tax from large corporations with international operations will be welcomed by small business owners, who will appreciate the effort to level the playing field for Australian small and medium enterprises competing with multinationals.

And businesses owners with spare resources to pay lawyers and accountants will still be in a better position to squeeze more out of the small business changes mooted in the budget than can less well-off business people.

The too hard basket

The thornier issues that remain for small business are probably non-budget. These include issues arising from the Competition Policy Review, which seeks to re-balance power in the marketplace to benefit small enterprises selling to larger ones.

And the higher compliance costs faced by Australian producers of products such as berries that are not imposed on imported goods.

These are all much more relevant for small business owners (to a greater or lesser degree) than anything announced this week, but tend to sit and stay in the too hard basket.

We should not miss the big picture, however. Small businesses sink or swim with the health of the wider economy. By spurring investment by small business, the government hopes to see investment and jobs growth across the board. If this works, we will all benefit.

* Clarification: This article was updated on Wednesday May 12 at 1pm to clarify that the $20,000 limit applies to each individual item and that small businesses can apply this $20,000 rule to as many individual items as they wish. Thanks to reader Jim Travers for his comment to the author.


Read more of The Conversation’s Federal Budget 2015 coverage.

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