Today’s changing environment: no matter how you look at it, it is becoming more and more difficult for small businesses to plan for the future. The swift rate of change in technology, legislation and taxation for small businesses imposes new challenges for both small business owners and their accountants, but also opportunities.
Accountants have the additional burden of having to understand the changes in legislation and technology, but also being able to communicate these effectively to their client. However, accountants who are able to meet these challenges will be given the opportunity to effectively meet the needs of their small business clients, and add significant value for them.
This article provides a snapshot of the current landscape of relevant rules applying to small businesses, but also offers a small window into the ways that accountants can identify opportunities to provide additional value to their small business clients to help them to navigate with greater confidence through this uncertain environment.
Staying up to date
It is important for small business to stay on top of their financial information. And today, due to advancements in technology small business owners are able to gather financial information at any time of the day. Gone are the days where we only received this type of information on a monthly or quarterly basis, or waited in queues at the bank teller to see how much money we have.
This is a good thing! It allows small business to make decisions on how and where they stand at any time. However, not all business owners have the financial sophistication to take advantage of all this available information. Nor should business owners feel that they need to! In my firm, this means that we are able provide a more flexible, needs based service for our clients. For clients going through material issues or structural change, we are able to use the latest available information to provide indicative updates to the client’s position, even on a daily basis when this is necessary.
Legislative changes
A significant problem that small businesses have faced over the last few years are constant legislative changes. Exacerbating this situation is that since our last budget (in May 2016) certain budgetary measure are yet to be passed through Parliament, providing significant difficulties for accountants wishing to explain with certainty to their clients what the rules will be over the next 12 months.
I am often asked “why is this an issue?” The government budget and election promise was to look out for the ‘little guys’ and as far as many clients are concerned, small business fall under his category of ‘little guys’.
However, the government is yet to confirm if the definition of a small business is to change. During the last May budget the government announced that businesses that earn up to $10 million (excluding GST) will be defined as a small business and be entitled to most of the small business concessions including the Abbot Government’s ‘famous’ $20,000 asset write off. This topic is still being debated in Parliament. For now we must still adopt the old rules however we must be aware that any legislative changes may be retrospective in effect.
We accountants are required to stay up to date with the legislative changes, especially the changes that impact our clients, in this case small businesses. The challenge for accountants is to be able to guide small business on how the changes may impact them given all reasonable legislative outcomes. We have tried to reframe our role in my firm as not just being small business accountants but also their advisors. We find that business owners appreciate the guidance that we provide and being made aware of the potential risks of different legislative outcomes.
State and federal taxes:
The following are some examples of the most common concerns of our small business clients with regard to their tax obligations.
Capital gains tax
“How much tax do I have to pay on my capital gains?” This is the most common question that I am asked! Unfortunately it varies from one entity to another.
Small businesses are entitled to the small business concessions on disposal of their business or on retirement and provided they satisfy them all they could end up paying minimal if not, no tax at all
Individual entities are currently entitled to a 50 per cent discount provided they have held the asset for greater than 12 months. Their assessable gain will be added to their taxable income and taxed at their marginal rate.
At the last election the Federal Labour Government promised that if elected they would reduce the capital gains discount from 50 per cent to 25 per cent which meant that individual’s entities would be paying tax on 75 per cent of their taxable gain. The current federal government has kept the Capital Gains Discount at 50 per cent however who knows what changes the future holds.
PAYG Tax
This year is the first year in my 12 years as a practicing accountant where we have seen PAYG Withholding taxes change (for some) a quarter of the way through the year. We saw the bracket creep increase for the middle to higher income earners move from $80,000 to $87,000. Before this the PAYG tax rates had not changed over the last 3 years.
Two of the major changes we have noticed over the last few years was the increase of the Medicare levy from 1.5 per cent to 2 per cent and the introduction of the deficit levy also known as the Temporary Budget Repair Levy. This is an additional 2 per cent levy imposed on taxpayers and alike who earn above $180,000. It is worked out by calculating the balance over $180,000 and multiplying it by the additional 2 per cent This deficit levy is in place until 30 June 2017 (subject to any government changes).
Goods and Services Tax
As it stands the federal government is still unsure about where they will increase the GST percentage from 10 per cent or not. There is talk it will increase to 12 per cent or even 15 per cent, but who knows. This is a “watch this space” issue as one can only speculate until the next budget or when the government decide to comment on whether or not they will increase it. We can also hope that they could choose to decrease it – we are all entitled to dream!
Payroll Tax
Payroll tax is a regressive tax that is imposed by the relevant states or territories under the Payroll Act on all taxable wages. The definition of ‘taxable wages’ captures a broad spectrum of payments paid by business, beyond just salaries and wages, often not easy to understand for many business owners. There has been an increase in reviews by the Office of State Revenue in what exactly businesses are classifying as taxable wages. Businesses must note that the yearly threshold of when Payroll Tax is applicable (in NSW) is from $750,000 and is taxed at an additional rate of 5.45 per cent. Each state has their own threshold and may vary from the threshold amount stated above.
Conclusion
All clients want certainty around their tax obligations over the next few years. The challenge for accountants is learning to communicate effectively the level of uncertainty around that taxation environment over the next few year, and to provide business clients with a realistic outlook of how any potential changes could affect their business. For my firm, this means engaging with clients around their business needs and plans over the next few years so that we can appropriately advise them on the potential risks posed by legislative change.
The information provided above is just a snapshot of the various issues and changes relevant to small business accountants. For accountants to be successful and relevant in this environment, we have to adapt our professional relationship with small business clients to a more personalised service. An accountant that can demonstrate that they understand clients’ needs will be able to demonstrate the link between the advice provided and the value added to their business.
David Giacobbe, tax accountant, FG Fintax
