Tax manna from heaven

All the evidence shows the economy is getting tougher by the day, so a 20% tax concession might end up being a lifeline to many SMEs. The small business PAYG tax cut now applies – don’t miss out.

Back in early December last year, the Government announced that to help small businesses get through the global financial meltdown it would introduce a 20% cut in the next quarterly PAYG tax instalment for 1.3 million small businesses – that is, businesses with aggregated turnover of $2 million a year or less.

That is, the PAYG instalment payable in respect of the December 2008 quarter would be cut by 20%.

These cuts are now in operation – see below – so if you haven’t heard about them, or are not sure if you qualify, see your adviser or accountant now – you may be pleasantly surprised.

The 20% PAYG instalment reduction applies to “small business entities” as defined in the tax law. In general a “small business entity”:

Carries on a business.
Satisfies the $2 million aggregated turnover test.

The 20% reduction applies to the instalment amount shown on the BAS dispatched by the tax office in December 2008 for the quarter ended on 31 December 2008. This instalment amount is due on or before 28 February 2009 (which will be extended to 2 March 2009 across Australia as 28 February falls on a weekend) for most small business taxpayers.

For some small business taxpayers (that is, small businesses that elect to report and pay GST tax on a monthly basis), this due date was yesterday, 21 January 2009. As such, for the quarter ended 31 December 2008, small business entities are only required to pay 80% of the instalment amount shown on the BAS on 21 January 2009 or 3 March 2009.

But note the exclusions.

Those not eligible for the 20% reduction are:

Businesses with an annual turnover of $2 million or more.
Businesses that work out their PAYG instalments on the basis of their instalment income (option 2 on the BAS). Their payments will automatically adjust when they apply the given rate to their actual income for the quarter.
Businesses that have varied the Commissioner-calculated PAYG instalment amount for the 2008-09 income year.
Businesses that pay only two instalment amounts annually as notified by the Commissioner on their BAS.
Someone not in business – such as an individual with only investment income.

It is important to note that the 20% reduction applies only to PAYG instalment. It does not apply to other tax liabilities – such as PAYG withholding, GST, fuel tax or FBT – that are payable at the same time.

Here’s an example.

Let’s say the tax liability of an eligible SME was $20,000 for the 2007-08 income year. Based on this liability, and taking into account a GDP uplift factor of 8%, the average PAYG instalment amount for the 2008-09 income year is $21,600, which is $5400 payable quarterly. With the 20% annual reduction in the PAYG instalment occurring on 28 February 2009, the SME will pay $1080 less than would otherwise be the case.

All the anecdotal evidence is showing the economy is getting tougher by the day. The 20% tax concession might end up being a lifeline to many SMEs.

As such, no SME should miss the opportunity to take advantage of it. While the tax office will likely contact those SMEs it considers eligible for the concession, it would be well to make sure you don’t miss out.

Contact your accountant today – paying 80% is better than paying 100%, anytime!