Nestled in the 2023-2024 federal budget is a promise to boost small business cash flow by tweaking tax conditions.
The measure pledges to reduce the planned increase in Pay As You Go (PAYG) and goods and services tax (GST) instalments, granting small businesses more freedom to use their cash how they want, when they want, before their annual income tax return comes due.
Here is what small businesses need to know about the scheme.
The PAYG system allows businesses to pay their expected tax liability in advance through periodic instalments.
This keeps profitable small businesses from paying a massive lump sum in tax when they file their annual income tax return at the end of the financial year.
The size of these instalments is initially determined by the Australian Taxation Office, and is based on the business’ most recently lodged tax return, which estimates how much the business is likely to earn over the next financial year.
For small businesses, those PAYG instalments are generally paid on a quarterly basis.
Small businesses are also required to tally their GST charged on their sales in their quarterly business activity statements (BAS).
Most small businesses with a GST turnover less than $10 million are required to calculate and pay GST amounts quarterly, although many choose to lodge annually — more on that later.
Crucially, small businesses are able to manually adjust their PAYG instalment rates if income surges, or if they actually run at a loss.
The adjustment rate is extra tweak to the instalment formula, designed to ensure the instalments keep up with a business’ likely income.
For example, if economic conditions improve for small businesses, prior PAYG instalment rates based on an employer’s prior tax situation alone might not keep up with their actual income tax liability.
Without adjusting the size of PAYG instalments to compensate, small businesses could still face a large lump sum income tax payment at the end of the financial year.
The adjustment rate is based on gross domestic product (GDP) changes over the past two calendar years, giving a rough indication of how well Australian businesses are performing.
The adjustment rate for the 2022–23 income year is 2%, reflecting the economic slowdown caused by public health restrictions and COVID-19 lockdowns.
This means the size of base PAYG instalments, set by the ATO, will automatically increase by at least 2% compared to the prior income year.
Rapid improvements in the post-lockdown economy would have seen the adjustment rate skyrocket to 12% in the 2023-2024 financial year.
This would have caused a major shock to small businesses reliant on PAYG and GST instalment rates set by the ATO.
However, the 2023-2024 federal budget halves the scheduled 12% rate to 6% for the upcoming income year (2023-2024).
For GST instalments, the refreshed adjustment rate applies to businesses with aggregated annual turnover under $10 million.
For PAYG instalments, it applies to businesses with under $50 million in annual aggregate turnover.
The budget papers frame the change as a win for small businesses, freeing up their cash flow as they battle new post-lockdown challenges — including higher inflation, rising interest rates, and a decline in consumer spending.
All told, the measure is likely to cost the government $1.64 billion over the 2023-2024 financial year through lower instalments.
However, the measure is projected to have no net impact on the government’s bottom line: income tax and GST payments will come due in full eventually, meaning that $1.64 billion will be recouped in 2024-2025 regardless.
Legislation is required to put those changes into effect.
The ATO is generally receptive to PAYG instalment adjustments, upwards or downwards, within reason.
Savvy accountants and tax agents would proactively adjust PAYG instalments based on their client’s performance anyway, even without the new 6% adjustment rate.
Lisa Greig, principal of Perigee Advisers, said those manual tweaks are easy enough to make for accountants like herself.
“We just adjust it,” she told SmartCompany. “It’s not a big deal.”
And as many small businesses file their actual GST liabilities in their annual tax return instead of relying on periodic instalments, the cash flow benefits won’t flow through to every SME.
The new measure is most likely to benefit SMEs handling tax on their own, who may struggle to balance their tax responsibilities with every other aspect of running an enterprise, Greig said.
“I would say the only way that businesses would benefit would be ones who haven’t got a diligent accountant advisor looking after them,” she continued.
In the event a small business owner does not manually vary their instalment rate before it becomes due, the 6% adjustment will obviously provide less of a quarterly shock than the original 12% uptick.
Set-and-forget businesses are less likely to cop an instalment underpayment penalty with a 6% adjustment rate compared to a 12% adjustment rate, too.
SMEs that see 6% as an appropriate increase will also save time and administrative effort fiddling with manual variances, while enjoying a cash flow boost compared to the vanquished 12% rate.
Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
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