While the headlines of the previous budget proclaimed small business owners would be paying less tax, many small business owners will actually be paying more tax as a result of the tax cuts.
If you run your business through a Company, and your turnover is below $10m, your Company will be paying less tax from 1/7/16 as the Company tax rate for these Companies has dropped from either 30% or 28.5% to 27.5%. This does mean a boost in cash flow for these companies but when the funds ultimately find their way to the business owners as dividends, the business owners will actually need to pay more tax than they otherwise would have without the tax cut.
This is because when a business owner receives a dividend from their Company, they are entitled to a credit for tax paid by the Company. However Companies are now only entitled to provide a credit based on their current tax rate rather than the tax rate they actually paid. The result is that any earnings retained in a Company from a year with a higher tax rate will attract additional tax for the shareholder when paid out. Below is an example of how this works on prior year profits before and after the tax cut.
Pre Tax Cut