What the 2015 federal budget means for your small business

What will this year's Australian federal budget mean for small businesses?

The Australian Government is promising a package of tax cuts, investment incentives, productivity enhancing measures and less red tape. But will this be enough to kick-start the economy?

Australian Prime Minister Tony Abbott says small business is “the vital beating heart of a strong economy”.

That may be so, but it seems that it will take a lot more than the minimum 1.5 per cent tax cut flagged by the federal government to get the sector’s pulse racing.

While small business groups and analysts say any tax relief is welcome, they warn that to revitalise activity the government needs to embrace a more ambitious and comprehensive reform agenda to transform the commercial environment.

They have handed the government a long shopping list of suggestions that includes more generous investment and innovation incentives, reduced compliance costs and more favourable financing arrangements – some of which will come cheap.

The crucial issue of confidence

Even the most business-friendly arrangements are for nought if investors hesitate to lay their money down, and optimism about the economy’s prospects is scarce.

The Reserve Bank of Australia and the Australian treasury have downgraded near-term growth forecasts – the RBA does not expect activity to pick up significantly until late next year – and the International Monetary Fund has warned the world risks becoming mired in persistent lacklustre growth without a major effort by policymakers.

For embattled small businesses, it is hardly an encouraging outlook – CPA Australia’s Asia-Pacific Small Business Survey found just 47 per cent of firms interviewed last year expected to expand, and evidence suggests the outlook has become even gloomier since.

Business groups and analysts are arguing that now is not the time for the government to screw down even more tightly on public spending.

Monetary and fiscal policy at odds

Since the last budget, the country has been treated to the spectacle of fiscal policy that is sharply at odds with the thrust of monetary policy. While the government has been cutting jobs and pulling back spending, the RBA has sliced the official cash rate to a multi-decade low of 2.25 per cent, and markets expect it to go even lower.

In ordinary times, such low interest rates would result in a borrowing binge by firms big and small. But when conditions are as subdued as they are now, cheap finance counts for little when business owners can see little reason to upgrade and expand.

The government, following a year of frustration in the upper house, has changed its tack and is looking to foster economic activity.

Treasurer Joe Hockey has vowed the government will no longer engage in “an arm wrestle” between easier monetary policy and tighter fiscal policy, and Small Business Minister Bruce Billson has promised a package of measures to encourage small enterprise investment and productivity while cutting red tape.

Aside from the promised tax cut and vague assurances of “practical encouragement and incentives”, details of the government’s plans are scant and it is under pressure to do more to foster growth.

In its pre-budget submission, CPA Australia has urged the government to switch its focus from austerity and “chasing surpluses for their own sake” to stimulating activity and fostering growth.

To encourage innovation, the peak body suggests tax concessions and offsets for patent-derived income and research and development investment, and deferring the point at which employee shares and options are taxed.

In addition, CPA Australia proposes small business-specific changes, like easing the tax compliance burden, restoring the instant asset write-off threshold to A$6500, reintroducing loss-carry back provisions, expanding access to the R&D tax incentive and greater investment in improving small business management skills.

The Council of Small Business Australia has a similarly long shopping list of measures it wants the government to consider.

CPA Australia’s Business Policy Adviser Gavan Ord hopes some ideas, such as lifting the small business entity threshold to A$3 million – which was backed by the recent Board of Taxation review – will be in the budget.

But he says it is unlikely the government will backtrack on decisions in last year’s budget to axe loss-carry back provisions and slash the instant asset write-off threshold to just A$1000.

Instead, he warns, decisions on more significant changes to the tax system will probably be deferred as part of the government’s broader overhaul of the tax system, which is not expected to make any changes until after the next federal election.

CPA Australia has urged the government to switch its focus from austerity and “chasing surpluses for their own sake” to stimulating activity and fostering growth.

Confidence tough to boost

In the absence of major changes, observers believe any budget boost to the mood of small business is likely to be short-lived.

“There might be a small bump from the budget, but I don’t think that will last because most of the major reform ideas will be pulled into the Tax White Paper process, which will be beyond the next election,” Ord says.

Ord and Market Economics managing director Stephen Koukoulas think any budget assistance or tax relief for small business will not be enough by itself to spur activity, regardless of how welcome it may be.

Koukoulas says any boost from such changes will be quickly swamped by the adverse business environment.

“They are all fine and very good ideas, but there is no point in lower tax if you haven’t got any profit,” he says.

Related: Government seeks GST on digital goods

This is a problem for the government, which is due to go to the polls in the second half of 2016, and not good for growth.

The government has found its failure to get signature policies through the Senate and its continued pronouncements on the state of the economy is undermining its attempts to reassure investors and re-energise activity.

“People are hearing mixed messages from the government,” Ord says.

“They are leaving people sceptical and concerned, and they will be concerned that anything announced may not get through the Senate.”

Koukoulas agrees and warns that even with another interest rate cut – tipped by mid-year – growth will remain lacklustre.

Ten things small business wants in the budget*

  • Reduce the company tax rate to 28.5 per cent for all companies on 1 July 2015 and move to a significantly lower rate over the medium to long-term
  • Reinstate A$6500 threshold for instant asset write off
  • Reintroduce loss-carry back provisions
  • Scrap and replace A$6 million asset value test for capital gains tax concession
  • Increase small business entity turnover threshold to A$3 million
  • Raise threshold for access to 45 per cent tax offset for R&D investment to A$50 million aggregate annual turnover
  • Defer taxation of employee shares and options to point of sale
  • Halve company tax rate on intellectual property-derived income
  • Fund programs to boost small business management skills
  • Significantly simplify the tax treatment of certain payments, loans and debt forgiveness by a private company to a shareholder or an associate (Division 7A)

* As set out by CPA Australia

Read more:

5 reasons why a family business fails

Sometimes it's better to be David than Goliath

8 businesses that transformed themselves