Small business gets a $720 million tax boost

The Federal government is offering a new tax break, for an estimated 1.5 million small business owners in Australia, self funded retirees and small superannuation funds.

The new break, which will cost the government an estimated $720 million, is meant to boost small business cash flows, during the present crisis.

The Treasurer, Wayne Swan, said:”What we’re going to do is reduce the uplift factor that applies to PSAYG tax instalments that are paid on a quarterly basis.

But Mr  Swan also confirmed the Prime Minister’s earlier admission that Australia will now, almost certainly, slide into recession.

In fact, we are already at least half way there.

The Statistician reported that the Australian economy contracted by 0.5 per cent in the final three months of last year.

Two consecutive quarters of negative growth make a recession, on most economists’ reckoning.

Speaking to reporters over the weekend, Mr Swan said the government is expecting fresh forecasts from both the OECD and the World Bank this week.

“…and if there are substantial downgrades there, I think it will be almost inevitable that Australia will experience a period of negative growth,” he added.

This admission, that a recession is imminent, is very close to one the Prime Minister made, before he left Australia to visit Washington and London.

Mr Swan said this was the main reason why the tax break is being offered.

Byt the way it is being made is complex.

The passages below, taken from the official announcement, spell it out.

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Who will receive the reduction?

The PAYG instalment reduction applies to taxpayers whose PAYG instalments are adjusted for growth in GDP (GDP-adjustment method).

This method bases instalment amounts on the previous year’s taxable income, uplifted by a GDP adjustment factor.

This adjustment factor reflects nominal GDP growth over the previous two calendar years and is intended to calculate tax instalments payable based on expected profit growth.

However, as the adjustment factor is calculated on previous growth rates it will overstate expected profit growth where economic and business conditions have declined quickly.

Taxpayers using this method include those carrying on a business and those with investment income, for example self-funded retirees, and wage and salary earners with investment income subject to the PAYG instalment system.

In the main, small businesses, individuals and small superannuation funds are eligible to pay their instalments quarterly using the GDP-adjustment method.

How will it apply?

For the 2009-10 income year, the adjustment factor calculated under the tax law will be set at 2 per cent.

In accordance with the existing law, taxpayers may still vary their quarterly tax instalments, if they consider their income is expected to be lower or higher than the amount determined by the Commissioner of Taxation using the 2 per cent adjustment factor.

This reduction does not apply to taxpayers who calculate their instalments based on the instalment rate notified by the Australian Taxation Office. Their payments will automatically adjust