Small business breathe a $440 million tax relief

Up to 1.3 million small businesses will get relief on their tax bills with the Federal Government cutting the December quarter tax instalment by 20 per cent.

Australian businesses with an annual turnover of $2 million or less will qualify for the tax relief - a fresh move to help cope with the financial economic slump and prop up the economy.

The 20 per cent cut will apply to those business making quarterly instalments, based on projected turnover, which are due on March 2 and to those making monthly instalments due on January 21 2009.

The cut applies to the instalment amount shown on the Business Activity Statement sent out by the Tax Office this month.

This measure is estimated at $440 million, with the reduction more accurately reflecting small businesses' average actual profit growth in the current economic environment.

This tax relief is a change in the up front tax formula. Many businesses would have overestimated their projected tax liabilities for the year in the year prior using this formula before the financial crisis hit. This means it is not a tax cut as such - businesses will have to make up the unpaid amount later.

While the tax reduction is for the December quarter, the Government states it works out to five per cent annually. The rate at which the tax is eventually paid is not affected, but the relief means businesses can deploy the money freed in the short term to keep the business afloat.

The scheme of the tax relief provides an advantage of immediate and much-needed cash flow to small businesses, and encourages business confidence.

"For small businesses, cash flow is king," said Small Business Minister, Craig Emerson. "The Government recognises the importance in these challenging economic times of enabling businesses to retain as much of their cash flow as possible and this will give them a $440 million boost in cash flow at a time when it's most needed."

The provision for business taxpayers to vary instalments downward already exists; the Government believes the 20 per cent tax relief will take the pressure off individual businesses to re-calculate their liabilities.

Dr Emerson said businesses could reduce their instalments by applying to the Tax Office, though many rarely do so. This measure removes the need for businesses to make an application and would ease pressure on them.

The Government says the tax relief will be "reconciled" in subsequent years, assuming there is a recovery in the overall economy.