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Money / Financial management

Budget 2016 – small business named big winner but what does it mean to be small?

Budget 2016 landed this week and small business, the backbone of our economy, was at the forefront of the agenda. The community rejoiced as tax breaks and hiring incentives were announced to benefit them.

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As expected the initial response to Budget 2016 was positive, particularly from the industry associations. But as the dust began to settle many were left wondering if the initiatives went far enough.

The rationale behind the tax cut is a simple one: by alleviating the tax burden on SMEs we will encourage reinvestment in business. But just how much cash are we talking about and is it enough to stimulate “jobs and growth”?

Yesterday Mark Bouris came out swinging questioning whether a one per cent tax cut would do anything at all to help SMEs or the wider economy. He explained businesses with an annual turnover of $100,000 would only be $1,000 better off with this initiative. Some have argued that thanks to the extended small business threshold, the tax break will be applied to businesses with higher turnover, and will therefore yield greater return.

Bouris’ comments struck a chord with me and got to the heart of why this budget is problematic – we haven’t agreed what it means to be small.

Why size matters

Historically businesses were considered ‘small’ with an annual turnover of less than $2 million. The government will raise that threshold to $10 million later this year.

As a lender, we’ve seen the most demand for finance from businesses with annual turnovers between $100,000 and $1.5 million. These are the businesses which need the most support from our government, and yet they’ll yield the smallest return from the changes announced in this budget.

The government believes a one per cent tax cut will encourage businesses to hire staff and to grow. The problem is, the kind of money businesses can expect from this cut isn’t enough to make a meaningful reinvestment in their own operations.

When our customers come to us for help accessing financing (to say, run a marketing campaign, hire staff or open a new store), they’re asking for upwards of $100,000 on average. It costs time and money to grow a business.

Why size will continue to matter

Things will become even more problematic as the government continues to incrementally raise the threshold for what constitutes a ‘small business’ to $25 million in 2017-18, $50 million in 2018-19 and $100 million in 2019-20.

At that point, a business turning over $100 million dollars will receive the same taxation benefit as your local butcher or baker. As a supporter of micro, small and medium sized business we find this sliding scale problematic. Neither Labor, nor the Greens support this policy. In fact Greens leader Richard Di Natale called it “liberal corporate welfare”.

For the time being small business will receive a welcome break. Compared to last year, more than 900,000 ‘small’ businesses are now eligible for the lowest possible tax rate and we can’t deny that is a good thing. However we need to get clear on what it means to be ‘small’ before we move forward.

Are you a small business? Would you consider a business turning over $100 million to be small? Tell me below, I’d love to hear your thoughts.

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This post first appeared on the Spotcap blog and is republished here with full permission.

Lachlan Heussler

is the Managing Director of Spotcap Australia and has more than 15 years’ experience in financial services, both in Sydney and New York. He has witnessed the profound impact technology can have on financial services and is passionate about using technology to support Australian small business. Connect with him on Twitter, Facebook and LinkedIn.

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