Budget 2011 – Small Business

<h3>Tax write off for purchase of motor vehicles</h3>

The Government will allow small businesses to claim up to $5,000 as an immediate deduction for motor vehicles, with effect for vehicles acquired from the 2012-13 income year.

This is an additional break on top of the new depreciation rules that are proposed to start in 2012-13. The two key changes under the new regime are:

1. Immediate write off of assets under $5,000 (formerly $1,000)

2. All other assets go into an asset pool and are depreciated at a diminishing value rate of 30% (15% in the first year). The old rules had two asset pools with different rates.

Faster depreciation means businesses get the advantage of tax deductions sooner, improving short term cash flow.

There is nothing in the budget paper to suggest that the write off is restricted to new vehicles as was the case with the 50% investment allowance.

<h3>Abolishment of Entrepreneur’s Tax Offset</h3>

The entrepreneur’s tax offset provides a 25% discount on eligible small business income. Effectively, your business income is taxed at a discount to other similar income, such as wages.

The offset will be abolished with effect from the 2012-13 financial year. Previously, the rules had been tightened to limit the number of people eligible for the offset.

A full offset only applies if your business turnover (i.e. Income before expenses) was under $50,000, with a partial offset up to $75,000. So only very small were eligible in the first place.

<h3>Changes to Low Income Tax Offset for Minors</h3>

A common strategy for businesses running through a discretionary trust was to allocate part of the taxable profit to minors (children under 18). Special tax rules apply to minors such that income over $416 is taxed at penalty rates (effectively top marginal tax rate).

However, the low income tax offset could negate some of this extra tax, meaning minors could receive a much larger amount tax free. For example, for 2010-11 the amount was $3,333.

As the low income tax offset has risen since 2006-07, so has the effective tax free threshold of minors.

The budget proposes to put an end to this practice by taking away the eligibility of minors to the tax offset.

<h5>Warning!</h5> The changes also mean that if a child earns interest on gifts from parents/grandparents they may be liable for large tax bills. For example, if a child had $10,000 in a bank account earning 6% interest they would exceed the existing tax free threshold.