Recent changes to small business tax rates may impact your business more than you realise.
On 19 May 2017, the tax laws were amended to change the tax rate applicable to small businesses, as well as the threshold for determining what a small business is. Not only does this impact the current tax expense and tax payable for businesses falling within the threshold in the relevant income year, but it impacts the measurement of deferred taxes recognised for financial reporting purposes.
Entities preparing financial statements in accordance with Australian Accounting Standards are required to measure deferred taxes at the tax rate that is expected to apply when the asset is realised or the liability is settled. Given that the above amendments were enacted prior to 30 June 2017, this will impact deferred taxes recognised for June 2017 reporters and beyond.
Determining the tax rate expected to apply when assets/liabilities are realised/settled will require an understanding of the business intentions for the foreseeable future and a robust budgeting process.
With the stepped change to the threshold to determine whether an entity is a small business, an entity will need to estimate their ‘aggregated turnover’ in future years to develop an expectation of the tax rate that will be used in the deferred tax calculations.
Businesses will also need to determine when assets are expected to be realised and liabilities settled to measure their deferred taxes. Whilst in some instances this may be relatively straight-forward (e.g. unused tax losses), in many cases it will be quite a complex process (e.g. property, plant and equipment and employee entitlements). Temporary differences will generally be realised/settled in multiple periods in the future and theoretically, this would need to be determined on an item-by-item basis.
Management should review their current budgeting process to ensure they have accurate forecasting to reliably estimate their aggregated turnover as well as when assets/liabilities will be realised/settled.
If you'd like to seek any further clarity or guidance around these changes and what they mean for you, we encourage you to contact your local Findex adviser for more information.