Bringing tax cuts forward


11th October, 2018

The Prime Minister wants to bring tax cuts forward. What does that mean?

Scott Morrison will attempt to bring tax cuts for small businesses forward by five years – here’s how it would work.

Last year, the federal government unveiled a plan to reduce the company tax rate for companies with turnover of less than $50 million to 27.5 percent.

You can read about this here.

The plan then was the gradually reduce the rate to 25 percent over the course of several years.

But Scott Morrison has unveiled a plan to reduce the rate to 25 percent sooner rather than later should the legislation pass — it’s anticipated the 25 percent rate would kick in during 2021, instead of 2026.

A projection of the tax cuts under the new plan

The government says cutting the rate to 25 percent sooner would provide an extra $7500-$12,500 per year for a company with a profit of $500,000.

What’s more, Morrison has flagged a move to also bring forward tax discounts for unincorporated small companies on a similar timeframe.

So, what does this mean to you today?

Well, nothing so far.

The changes haven’t been put to parliament in the form of legislation – at the moment it’s an intention rather than a policy change.

If the changes are enacted, your MYOB software will be updated automatically to account for the change.

Previously, opposition leader Bill Shorten said he would oppose the cuts to businesses with more than $10 million in turnover – citing the cost to the government’s bottom line of the reduced revenue and skepticism over whether cuts would flow through to workers.

He’s since walked back on this position, and this week Labor announced it would support the acceleration of the cuts, giving the move bi-partisan support.

Why is this happening?

This is happening for two main reasons (other than the assumed reason that the government thinks it’s a good idea).

  • The government failed to get bigger company tax cuts through the senate
  • There’s an election next year

The government has tried, on several occasions now, to pass tax cuts for bigger businesses – but has found stiff opposition in the senate.

So the government has formally walked away from trying to pass bigger business tax cuts, and thinks stimulating the economy through company tax cuts will be more palatable if it does so through smaller businesses.

That’s important, because there’s an election coming up next year, and small businesses not only make up the vast majority of enterprises in Australia, but they employ a lot of people.

So the government sees making small business happy as a popular move.

Do tax cuts work?

This is a point of contention among economists and politicians.

One economic theory holds that if a company has more money to play with, it will hire more staff, invest in new equipment, and generally put the money back into the business.

This creates what’s known as a ‘multiplier effect’, where the tax cut means the government gets less money from company tax, but more money from things like payroll tax and a cut of the goods and services bought in the community.

You may also have heard of this referred to as ‘trickle-down economics’.

Not everybody agrees that the theory plays out as intended in real life.

KPMG, which helped the government design the broader suite of tax cuts last year, said it would likely not play out like that.

“What we’re likely to see happen is that many small business owners will end up accruing that extra income as a dividend, and it becoming personal income,” KPMG’s chief economist, Brendan Rynne, told The Pulse last year.

That’s still a good thing for the economy – because the small business owner will need to spend that somewhere in the economy – unless they quite literally stash the extra money under a mattress.

Getting small business owners an opportunity to accrue a dividend is also important, because MYOB research has found, consistently, that small business owners don’t invest in themselves.

For example, in September 2016 we found that a third of small business owners weren’t paying themselves superannuation.

Whatever happens next, it’s becoming more clear that taxes continues to be a hot-button issue that will continue to be debated fiercely in the lead up to next year’s federal election.