Franchisors, what’s in the Budget for you?

What will the Budget 2016 do for the franchise sector? There are wins for the small and medium sized enterprises (SMEs) that make up the bulk of the Australian franchising sector.

The franchising sector's peak body, the Franchise Council of Australia, has welcomed the Budget initiatives to stimulate economic prosperity in the small business sector.

FCA executive chairman, Bruce Billson, said “Almost all franchisees and 95 percent of franchisors operating in Australia are small businesses. The small business tax cuts announced in the 2016 budget will provide these entrepreneurs, who collectively deliver $144bn of revenue into the Australian economy, with long term benefits through lower company tax rates.

Franchisors and franchisees are also set to gain the immediate benefit of a reduced tax rate of 27.5 percent for businesses with an annual turnover to $10m, simplified BAS reporting as well as expanded access to immediate deduction for asset purchases of up to $20,000 and access to the cash flow benefits generated by these deductions."

The Treasurer Scott Morrison delivered his first budget saying “Small and medium businesses are driving jobs growth in Australia and must continue to do so. They are overwhelmingly Australian owned and more likely to reinvest their earnings in future growth, as they seek to build their businesses.”

Morrison added “A tax on their businesses is a tax on their enterprise and the jobs they provide.”

So what does this mean? Here’s a quick snapshot – see below for more detailed analysis.

Budget for small business

From 1 July SMEs with an annual turnover of $10m or less will have their company tax cut to 27.5 percent.

The Government plans to raise the threshold for this rate over time: by 2019-20 companies bringing in $100m will be able to access the 27.5 percent tax rate, reports SmartCompany.

The Government will also expand the role of the Small Business and Family Enterprise Ombudsman.

A total of $16.3m over four years will fund the expanded advocacy role; $4.2m has been set aside for the 2016-17 financial year, $4m each for the following two years, and $4.1m in 2019-20.

In a move to encourage entrepreneurship, the Government is introducing an ‘Exploring My Own Boss’ initiative with workshops and self-employment starter packs to guide unemployed Australians to consider running their own businesses.

This initiative will be part of an expanded New Enterprise Incentive Scheme, funded with an extra $89m, which will come into play from 1 December 2016, StartupSmart reports.

FCA chair Billson said “With the sector being a major employer of young people, the new youth employment initiative is of great interest and the sector will no doubt welcome the incentives to provide even more job opportunities for young people.”

The Government has proposals for BAS too, which the CEO of the Council of Small Business Australia, Peter Strong, praised.

"The simplification of the BAS shows a commitment from the government and the ATO to making compliance easier and reflects the fact that the great majority of businesses are honest and transparent in their dealings with government and need less monitoring and better flexibility,” he said.

Small business concessions

Joanne Wynne, principal at national accounting and advisory firm RSM Australia, said “Growing businesses which have a turnover that has exceeded the $2m threshold will welcome the proposed increase in the turnover threshold.  

“This will open up to them a raft of concessions which should ease their compliance burden and tax cost.  

“The general business economy will also welcome this change as they are likely to find over the next 12 months more businesses are willing to invest in capital assets due to being able to claim an outright tax deduction for assets costing less than $20,000.”

Wynne highlights that from 1 July 2016 all businesses with a turnover of less than $10m will have access to the following concessions:

  • Simplified depreciation rules such as pooling and an immediate deduction for assets costing less than $20,000 up until 30 June 2017;
  • Simplified trading stock rules whereby a year end stocktake is not required if the value of stock has changed by less than $5,000;
  • The option to make PAYG instalments using the ATO instalment amount rather than calculating themselves;
  • Option to account for GST on a cash basis rather than an accruals basis;
  • More generous Fringe Benefits Tax exemption for work related portable electronic devices (to apply from 1 April 2017);
  • Access to the 12 month prepayment rule concession;
  • Option to trial a simpler Business Activity Statement format which is proposed to reduce GST compliance costs.

“These changes should reduce the compliance and tax cost for small to medium taxpayers and stimulate spending over the next 12 months with the $20,000 immediate write-off for depreciating assets being available to more taxpayers,” Wynne said.

However she points out that this threshold increase does not apply to the small business capital gains tax concessions.

"For capital gains tax concession purposes the turnover threshold will remain at $2m and the maximum net asset value test will remain as $6m.”

There are tax benefits in the Budget for small businesses formed as partnerships or sole traders.

“The current tax discount of five percent will increase to eight percent from 1 July 2016 and will incrementally increase to 16 percent over 10 years.  

The Government will also increase the turnover threshold for these taxpayers from $2m to $8m,” explained Wynne.

There will be greater clarity around tax compliance.

“The Government has also announced targeted amendments to Division 7A which will assist closely held private groups. Detail on the exact changes has not been released however, the Budget paper states:

  • A self-correction mechanism will be implemented for inadvertent breaches of the rules;
  • Appropriate safe-harbour rules will be introduced to provide certainty;
  • Simplified Division 7A loan arrangements will be introduced; and
  • A number of technical amendments will be made to improve the operation of Division 7A and provide increased certainty to taxpayers.

“Any changes which aim to ease the burden of Division 7A are welcome as the current legislation is inflexible and does not easily allow for corrections for genuine mistakes made by taxpayers,” said Wynne.