Disinformation surrounds 1% tax cut
THE corporate tax rate is now not going to drop to 29% and this has caused a lot of uninformed comment about the effect on small business.
The reality is that most small businesses do not work through a company structure - they tend to be sole traders or in partnerships. But, even if they did work through a company, a cut in the company tax rate from 30% to 29% is not going to compensate them for the extra cost of compulsory superannuation going to 12%.
Suppose a business uses a company structure and has a gross income of $500,000. From this, deduct general running costs of $100,000 and wages of $300,000. Under the present system, compulsory superannuation would add 9%, or $27,000, to the wages bill, bringing total expenses to $427,000.
This will leave the company with a profit of $73,000 on which company tax at 30% would be $21,900, leaving a net profit after tax of $51,100 for the shareholders.
If compulsory superannuation rises from 9% to 12%, and all the other figures remain unchanged, the superannuation bill would rise to $36,000, and reduce the pre-tax profit from $73,000 to $64,000.
A reduced company tax rate of 29% would cut the tax from $21,900 to $18,560, but the net profit after tax would reduce to $45,440.
In any event, thanks to the franking system, a movement up or down in the company tax rate does not affect the position of the shareholders.
If a company made a net profit of $100,000 and the company tax rate is 30%, there would be $70,000 available for distribution after company tax of $30,000. The tax on this would be $7000 for a 37% rate taxpayer, leaving them with $63,000 after tax.
A drop in company tax to 29% would mean that the dividend would rise to $71,000 but the franking credits would fall to $29,000. For a 37% taxpayer the tax after franking credits would be $8000 - the shareholder is in exactly the same position.
Noel Whittaker is a co-founder of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org