SNAPSHOT OF BENEFITS
For some time now, a small business has been able to access a number of existing concessions covering the following areas of tax:
- Capital gains tax (CGT)
- Income tax
- Goods and services tax (GST)
- Pay as you go instalments (PAYGI), and
- Fringe benefits tax (FBT).
Until 30 June 2016, a business with turnover of less than $2 million was eligible for this range of concessions. On 1 July 2016, the SBE threshold
was increased to $10 million.
The $10 million turnover threshold applies to most concessions, except for:
the small business income tax offset, which has a $5 million turnover threshold
the capital gains tax (CGT) concessions, which continue to have a $2 million turnover threshold.
Eligible businesses can pick and choose the concessions that best suit their needs, helping them to reduce red tape and compliance costs.
Small businesses may be eligible for the following concessions:
- Choice to account for GST on a cash basis
- Choice to pay GST by instalments
- Annual apportionment of GST input tax credits
- Simplified trading stock rules
- Simpler depreciation rules
- CGT 15-year asset exemption (subject to turnover / assets tests)
- CGT 50% active asset reduction (subject to turnover / assets tests)
- CGT retirement exemption (subject to turnover / assets tests)
- CGT roll-over provisions (subject to turnover / assets tests)
- PAYG instalments based on GDP – adjusted notional tax
- Two-year period for amending assessments (exceptions may apply)
- Immediate deductions for certain prepaid business expenses, and
- FBT car parking exemption
ELIGIBILITY FOR THE SBE
- The SBE applies to all business structures or entities;
- The entity must be carrying on a business in that year of income;
- The entity must have an aggregated SBE turnover (see below) for itself and any affiliate of less than $2 million.
An entity’s aggregated turnover for an income year is the sum of its own “annual turnover” and the turnovers of other relevant entities; that is:
- Its affiliated entities and
- Its connected entities.
An entity is connected with another if:
- Either entity controls the other entity in a particular way
- Both entities are controlled by the same third party in a particular way.
- If your aggregated turnover for the previous income year was less than $10 million, you are an SBE for the current year.
- If your estimated aggregated turnover for the current year is less than $10 million, you will be an SBE for the current year. You can only use
this method if your aggregated turnover was less than $10 million for one of the last two income years.
- If your actual aggregated turnover at the end of the current year is less than $10 million, you are an SBE for the current year.
These provisions are similar to those that apply to the small business concessions for CGT.“Effective control” applies when there is a legal or beneficial
right to at least 40 per cent of income or capital or at least 40 per cent of the voting power.If between 40 per cent and 50 per cent, taxpayers
will not be grouped if they can demonstrate to the
ATO’s satisfaction that a third-party exercises effective control.
An immediate write off for depreciating assets costing less than $6,500 from 1 July 2012 (formerly $1,000) was available to SBE taxpayers.
The Coalition government removed this concession for assets purchased from 1 January 2014 and the $1,000 limit again applied from this date.
The 2015 Federal Budget announced an immediate write-off up to $20,000 for assets acquired after 7.30pm 12 May 2015 and prior to 30 June 2017. The
2017 and 2018 Federal Budget extended this date to 30 June 2019.
Most other depreciating assets are pooled in the general small business pool, irrespective of their effective life.Newly acquired assets are depreciated
at 15% in the first year, regardless of the date on which they were acquired.In subsequent years the assets are depreciated at 30% on the diminishing
The 2017 Federal Budget allows an immediate write-off of the small business pool (including existing pools) if the balance is less than $20,000 at
the end of a financial year, until 30 June 2019.
For assets used only partly for business purposes, only the business proportion is attributed to the pool.When an asset is sold, the entire sales proceeds
are credited to the relevant pool which reduces the total amount on which depreciation is calculated.Using this method, no balancing adjustments
SBE taxpayers and individual taxpayers incurring deductible non-business expenditure (e.g. rental property expenses and work-related expenses) can
apply the 13-month prepayment rule.
Such taxpayers are eligible to claim prepaid expenses, provided the period covered by the prepayment does not exceed 12 months and concludes before
the end of the following financial year.
All other business taxpayers, other than individuals who incur deductible non-business expenses, are required to apportion such prepaid expenses over
the service period to which the prepayment relates.
ACCOUNTING FOR GST ON A CASH BASIS
Small business entities can choose to account for their GST using the cash accounting method.It means you account for GST when income is received and
when expenses are paid.The advantage of the cash accounting method is that the money flowing through the business is better aligned with your activity
If you are an SBE taxpayer, you only need to conduct a stocktake and account for changes in the value of your trading stock if there is a difference
of more than $5,000 between:
The value of your stock on hand at the start of the income year, and
A reasonable estimate of the value of your stock on hand at the end of the income year.
While in the SBE you can, if you wish, still conduct a stocktake and account for the change in the value of trading stock in any income year.
If the value of your trading stock varies by $5,000 or less and you choose not to do a stocktake and account for the change in value of trading stock,
the value of your closing stock is deemed to be the same value as your opening stock.
If you conduct a stocktake for tax purposes, all trading stock on hand at the start and at the end of the income year is taken into account in working
out your taxable income.
To work out the value of trading stock for tax purposes at the end of the income year, generally a stocktake is required.This involves working out
the physical quantities of stock on hand and assigning a value to each item of stock.Each item of stock is valued at either, cost, market selling
value or replacement value.
The sum of the total number of items of trading stock on hand multiplied by the value of each item produces the total value of trading stock on hand.The
process of making a reasonable estimate of your closing stock, when using the simplified trading stock rules, may involve an estimate of both the
quantity of stock on hand and the value of each item of stock.
The special valuation rules for trading stock can be used in making your reasonable estimate.For example, the specific rules for the cost of natural
increase of livestock and rules in relation to obsolete stock may apply.
You may also consider tax rulings on the valuation of trading stock for particular industries.
Tax cuts for both incorporated and unincorporated small business entities from the 2015-16 income year were confirmed, providing much needed cash flow
relief to stimulate business activity and growth.
From 1 July 2016 the company tax rate fell from 30% to 27.5% for small business companies.
Unincorporated small businesses will benefit from an 8% discount on income tax payable on income from business activity.The discount is capped at 1,000
per individual for each income year and is a tax offset.
The rate reduction does not affect the Company’s franking ability as the current maximum franking credit rate for a distribution remains unchanged
at 30% for all companies that are not SBE for 30 June 2016. SBE franked distributions will be at their respective tax rate, for the 2016/17 year
The package will also include the following measures available since 1 July 2015:
- Easier access for small businesses to crowd source equity funding by providing necessary funding to Australian Securities and Investment Commission
(ASIC) to simplify reporting and disclosure requirements.
- Investment into software allowing business to deal with Government agencies such as ASIC and the ATO more efficiently.
- Immediate deduction for a range of professional expenses associated with starting a new business, such as professional, legal and accounting advice,
instead of spreading the deduction over five years.
Since 1 July 2015 tax relief has been available for small businesses that change their legal structure by way of a capital gains tax rollover.
EXTENSION OF SBE BENEFITS
As mentioned above, since 1 July 2016 all businesses with annual turnover of less than $10 million will have access to:
- simplified depreciation rules, including immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2018 – now extended
to 30 June 2019.
- simplified trading stock rules, giving them the option to avoid end of year stocktake if the value of their stock has changed by less than $5,000;
- a simplified method of paying PAYG instalments calculated by the ATO, which removes the risk of under or over estimating PAYG instalments and the
resulting penalties that may be applied;
- the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;
- other tax concessions currently available to small businesses, such as fringe benefits tax (FBT) exemptions (from 1 April 2017 to align with the
FBT year); and
- a trial of simpler business activity statements (BAS), reducing GST compliance costs, with a full roll-out from 1 July 2017.
These threshold changes will not affect eligibility for the small business capital gains tax concessions, which will remain available for businesses
with annual turnover of less than $2 million or that satisfy the maximum net asset value test.
Also refer to Chapter 1 for increases in the Unincorporated Small Business Tax Discount and proposed reductions in company tax.