FEDERAL BUDGET – What it means to you

What goodies can you expect to get from this week’s Budget.

Wayne Swan delivered a fairly tame, yet solid, Federal Budget for the nation this week. Whilst the $40.8 billion deficit looks scary it is actually $16.3 billion less than what was expected. The Treasurer is also predicting a return to surplus three years earlier than expected. Good news.
Only a handful of goodies were expected after the handouts we got in last year’s stimulus packages. But what would an election year be without a few incentives? Here is what you can expect.

Low Income Earners

In 2010/11, the Low Income Tax Offset will increase from $1,350 to $1,500. This is great news for low income earners who will be able to effectively earn up to $16,000 tax free. The Senior Australian Tax Offset will also increase to $30,685 for singles and $26,680 each for couples.

Tax cuts

Most taxpayers can expect a $300 tax saving from 1 July as the 30% marginal tax rate threshold increases from $35,000 to $37,000. The 38% marginal tax rate will decrease to 37% resulting in a potential tax saving of up to $1,000 for those earning more than $80,000.

Medicare levy threshold

Singles earning less than $18,488 and couples with a combined income under $31,196 will be exempt from paying the Medicare Levy in the 2009/10 year. However the threshold that taxpayers can claim 20% of net medical expenses has risen from $1,500 to $2,000.

First Home Savers

First Home Saver Accounts holders will no longer have to wait four years before they are able to buy a home due to a relaxation of the rules.

Super guarantee increasing

As announced in the Henry Tax Review, the super guarantee levy will be gradually increased by 3% to 12% in 2019.

$500 more for low earners

The Government will top up the super funds of wage earners by $500 if they earn less than $37,000.

Concessions for over 50s

Workers over 50 who have less than $500,000 in super will be able to contribute up to $50,000 a year from 2012.

Lower company tax

The company tax rate will reduce by 2% to 28% by 2014 with small businesses getting access to the cut a year earlier. Small business also wins with an immediate write-off for assets up to $5,000.

... the 50% tax discount on up to $1,000 of interest income from 1 July 2011. This will definitely make saving alot more attractive and provides an even playing field to those already enjoying tax advantages for share and property investments. This will place downward pressure on banks’ funding costs resulting in more competitive loan rates for home owners.

... the $500 standard deduction for work related expenses from 2012/13. An unofficial “$300 without receipts” system has been operating for umpteen years and it has been long overdue a CPI upgrade. According to ATO statistics, the average tax deduction claimed by individuals in 2007/08 was $3,311.

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When your business shouldn't bother with the 50% Bonus Deduction

Well the Federal Budget came out last week and most pundits labeled it as a pretty tame affair particularly with respect to businesses. I have to agree.

There was no change for large business and the only significant change for small business was the extension & increase of the Small Business Tax Break – from 30% to 50% bonus deduction to small businesses (ie turnover under $2M) for assets acquired between 13 December 2008 to 31 December 2009.

The media have been raving about how great this measure is for small business. 50% extra deduction. Sounds great doesn’t it? Well I am not that excited for quite a few reasons as outlined below:

1. To enjoy the bonus deduction your business has to outlay extra cash to buy the assets. With times being tough, cash is king. Don’t forget my A-B-C motto of money matters – Absolutely Bloomin’ Cash – a business with poor cashflow is going to struggle in the coming months and years. Why put pressure on your cashflow if you don’t need to? I am predicting alot of businesses will get their cashflow requirements wrong & get into strife, thus putting more pressure on the economy if businesses fail.

2. So let’s say that you want to preserve your cash. And that you want to finance the purchase instead. If you need to finance then you are merely putting more pressure on the business’ balance sheet and future cashflow commitments. And business finance is not cheap these days either despite the RBA reducing the benchmark interest rate significantly in the last year. Haven’t we learnt any lessons from the global financial crisis?

3. Most businesses operate as a company. And the company tax rate is 30%. This means that you are only truly saving 15% (being 50% of 30%) on the ticketed price of an eligible asset purchase. Not 50% that some business people believe. It is only 9% for large businesses as they are only getting a 30% bonus deduction. If my business needs an asset then I am going to look at second hand first because you are saving alot more than 15% from the cost of a brand new asset. You can probably negotiate a discount of that size as well anyway!

4. The industry that is heavily promoting the 50% tax break is the car industry. God knows that this ailing industry needs a helping hand & the 50% deduction will definitely give them more customers in coming months. But remember that you need any car purchase registered in the same entity as your ABN. For small businesses this is a company structure. And we know that when companies have cars owned by them and provided for the benefit of employees and their associates that Fringe Benefits Tax may apply. If the car is hardly used – that is, less than 15,000 kilometres travelled per year – then the FBT rate is 26% of the original cost of the car … every year as well before reducing by 1/3 in the fourth year and beyond that you have the car. Yes the taxman giveth … but the taxman can taketh away too!

By all means if your business desperately needs to buy an asset then by all means go out & take advantage of this great Tax Break. But don’t go out of your way for a 50% tax deduction because it really isn’t as attractive as what you may think!

Is your business going to take advantage of the 50% Tax Break?

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