By: Max Newnham
There have been many examples of small business owners being discriminated against when it comes to income tax and superannuation.
A historic example related to the tax deduction available to the self-employed. While employees could salary sacrifice contributions and effectively receive a tax deduction for 100 per cent of a contribution, self-employed people were allowed a deduction for 100 per cent of a contribution up to $3000 per year, and then only 75 per cent of the excess.
With the passing of the small business entity tax and capital gains tax concessions, small business owners are now receiving tax benefits that recognise the risks they take and the contribution they make to the Australian economy. Photo: Jessica Shapiro
This and other inequities in the tax system have been corrected and, with the passing of the small business entity tax and capital gains tax concessions, small business owners are now receiving tax benefits that recognise the risks they take and the contribution they make to the Australian economy.
The latest change to self-employed super contributions will remove the final disadvantage with regard to superannuation. Under existing laws a tax-deductible self-employed super contribution cannot be made if a person’s employment income is 10 per cent or more of their total assessable income. From July 1, 2017, this rule will be scrapped.
There are, however, other areas in which self-employed business owners are still discriminated against.
Q. I have been running a small business for many years as a sole trader. I will be turning 65 in April and have started the process of applying for the age pension. On one of the forms I have to advise Centrelink of how much profit my business is making as it will be counted under the income test. I had heard, to encourage people to work longer, that a discount was applied to earnings under the Centrelink age pension income test. Will this apply to me?
A. You are right about there being a work bonus scheme that encourages people to work longer by not counting all employment income under the income test. Under this scheme the first $250 per fortnight is not counted as income, with a maximum income of $6500 not being counted by Centrelink.
The work bonus scheme applies only to employment income, while 100 per cent of profits made by self-employed business owners is counted under the income test.
The only way that you can receive the benefit of the work bonus scheme is to become an employee of your business. This would involve you transferring your business into another entity, such as a company or family discretionary trust, and then becoming an employee of the business.
Thankfully, as a result of a new capital gains tax exemption that applies to small business owners when business assets are transferred into a new structure, there would be no adverse capital gains tax implications for you of changing to a trust or a company.
Before taking any action you should get professional advice to make sure that the extra age pension that you would be receiving will exceed the cost of transferring the business to the new business structure and other extra costs such as WorkCover insurance.
Source: The Sydney Morning Herald
