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How will the $3000 deduction cap impact small businesses?

How will the $3000 deduction cap impact small businesses?

The announcement of a $3000 cap on tax management deductions made in May 2017 has been met with much resistance. But what will this restriction placed on individuals mean for those running a small business? Let’s take a closer look at the details…

What exactly is the proposal?

Right now, individuals in Australia are legally allowed to claim a limitless number of deductions for management costs when filing their tax return. These costs include tax adviser fees, expenses associated with litigation such as Administration Appeals Tribunals, and completing and lodging tax returns forms. The Labor Party’s proposed cap would mean that the total would be restricted to $3000. No matter how much an individual spends, their deductions would be limited to this amount.

Why has this been proposed?

Bill Shorten drew attention to the fact that 48 individuals in Australia had earnings that totalled above $1 million between the years 2014 and 2015, yet did not pay tax. This was because their incomes had been deducted below the threshold. A further 2458 individuals also deducted $25000 from their earnings, claiming tax management costs when the average cost for this was $378 in the financial year. However, the proposal is expected to impact only some 1% of taxpayers, though budget savings over the next ten years are expected to be significant, of around $1.8 billion. The aim is to avoid impacting those earning less while targetting taxpayers who have managed to evade paying a fair amount.

Negative responses

Professional tax accountants have been the cap’s loudest critics, which includes bodies such as Chartered Accountants and the Institue of Public Accountants, as they fear many small businesses who are entitled to deductions would struggle to receive them under the new rules. They are adamant that costs of $1 million or above for tax management are particularly rare, making the blanket cap unfair for the vast majority of individuals. It’s not unusual for fees to be higher than $3000, however, especially in circumstances where complex relationships are at play or in relation to startups, as calculations can be more complex and time-consuming, increasing costs. This makes such a low cap a potential issue for many and could cause some individuals to miss out on advice they desperately need but will no longer be able to afford.

Potential positives

The Australian Institute argues that, as deductions are usually under $3000 for the majority of individuals, the cap will likely only affect business earning more than $500,000. This is backed up by the fact that those earning $250-500,000 averaged around $1715 in tax management costs, which is well below the threshold. To incur fees of above $3000 for small businesses earning well below that would be particularly unusual.

The impact on small businesses

The cap, if introduced, would apply to just personal tax management. Therefore, if a tax agent is being paid to deal with business statements and company taxes, these costs wouldn’t be included in the $3000 total. It’s very unlikely for most small business owners to reach this limit, so the proposal shouldn’t be a large concern.

However, the proposal could cause problems for those whose business and personal taxes are tied very closely together, as it could be harder to differentiate between the two, meaning their advice bills could be higher and exceed the limit.

The best way to understand how the cap could affect you and your small business is to seek advice and assistance from one of Australia’s most reputable private lenders.