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With the new Government policy announcement, will we finally see cash flow relief for SMEs or is it just kicking the can down the road?
The Federal Treasurer Josh Frydenberg has announced the government will provide small and medium-sized enterprises (SMEs) with red tape and cash flow relief. This will come in the form of reduced Pay As You Go Income Tax (PAYGI) instalments, facilitating pre-filling of payroll tax returns through data sharing, and providing online systems for eligible businesses to lodge taxable payment reports. 
The government also proposed to introduce a mechanism to enable trusts who may currently lodge paper income tax returns, to lodge electronically.
According to the treasurer, lowering the instalment amount will allow Australian businesses to use the money to invest, innovate, and create more jobs.
There is a lot to unpack in the Treasurer’s announcement, but the takeaway message appears to be that eligible individuals and small and medium business taxpayers will be provided with an opportunity to use the funds representing their annual tax liability, to fund temporary living costs or business innovation and expansion costs.
The proposed reduced PAYGI instalments will provide temporary, not permanent, relief and may in fact cause more significant cashflow issues when their actual income tax liability comes due and payable.
Reduced PAYGI instalments
The PAYGI instalment system provides a mechanism for taxpayers who have investment and/or business income to pay their estimated annual income tax liability throughout the income year, rather than in a lump sum when they lodge their income tax return.
The Treasurer’s announcement will not impact the overall yearly income tax liability of eligible taxpayers, it merely provides an opportunity to defer payment of the liability.
Under the proposed measure 2.3 million SMEs, sole traders, and individuals with passive income (including some self-funded retirees) who are eligible to use the instalment amount method on their periodical PAYGI instalment notice, will be able to access reduced instalment amounts.
Small companies who use the instalment rate method will be able to get refunds of instalments paid refunded, if financial performance declines.
Reducing the instalment amount (which is tied to the income tax liability of the last lodged income tax return) does not provide permanent assistance to individuals and small businesses.
The proposed measure merely 'kicks the can down the road'.
Where taxpayers take advantage of automatically lowered PAYGI instalment amounts (rather than taxpayer-initiated variations) and use the cash to invest, innovate or employ new staff, they may find themselves in a very challenging cashflow position when they lodge their income tax return as the funds that represent their actual tax liability may have already been spent.
It is important to note at this point, mechanisms already exist in the PAYGI system that enables taxpayers with changed circumstances (e.g. due to a change in investments, a decline in business, etc) to vary PAYGI instalments based on their estimated tax liability for the year.
Where the taxpayer has paid instalments exceeding their estimated tax liability, the excess can be refunded by the Australian Taxation Office (ATO).
Taxpayers who access the measure and use the funds that would have been applied to reduce their tax liability may face significant cash-flow pressures at tax lodgment time.
Data sharing and online filing
The use of digital systems to facilitate data sharing between State and Federal tax agencies may provide some administrative relief for businesses with payroll tax reporting obligations.
The ability for eligible businesses to report taxable payments electronically at the same time as activity statements are lodged is long overdue.
The digitalisation of trust income reporting will have limited impact, with the proposed development of electronic filing systems to only impact around 30,000 trusts that currently lodge paper returns.
This system is not expected to be in place until 1 July 2024.
It is difficult to see how this policy could bring real cash flow relief for SMEs, sole traders, and individuals with passive income.
The proposed measure is concerning, as it appears to communicate the message 'use your own money to fund living expenses, business operation, and growth, and worry about your tax liability later'.
Need help with your SMEs cash flow?
To find out how RSM’s advisors and tax specialists can support your business, contact your local RSM office today.
