Tax concessions for small business

The small business sector has variously been described as the engine room of the economy as well as the biggest employer in the country – and it’s not hard to see why.

Research has indicated that small businesses are responsible for generating millions of jobs, with some estimates that small business jobs account for around half of private sector employment.

What is a small business?
The definitions of what constitutes a “small business” are not consistent.

The Australian Bureau of Statistics defines a small business as having less than 20 employees, while for the purposes of the Corporations Law it is set at fewer than 50 employees.

From a tax perspective, the bar is set at having annual turnover of less than $2 million and for the entity concerned to be “carrying on a business”. If these conditions are satisfied, the entity is referred as a “small business entity”.

Specifically, the tax law stipulates that this turnover is “aggregated”. In very broad terms, this means the annual turnover of the business must include the turnover of every entity that is “connected to” or “affiliated” with the business. There are certain amounts that are to be included or excluded in the definition of turnover – for example, GST is excluded. Speak to this office for further information.

A large business cannot therefore split its activities so that each “division” can slip under the $2 million threshold in order to gain access to the various tax concessions.

What concessions are available?
No matter which definition is used however, the one thing that everyone agrees on is the central role that small business plays in the Australian economy. Just how important can be underlined by the fact that the government has seen fit to give the small business sector a break on a range of tax matters.

There are several tax concessions that smaller enterprises can take up:

Simplified depreciation
The advantage of this concession is that it is easier to do the tax depreciation calculations.

These simplified rules mean that small businesses can immediately write-off assets that cost less than $20,000 until June 30, 2017. This can include some big-ticket items as well as assets such as photocopiers, laptops, fridges, desks and so on.

A business can depreciate assets that are equal to or greater than the $20,000 threshold in a depreciation pool at a rate of 30% (15% in the first year). The pool balance can also be written off for an income year if the relevant balance falls below the $20,000 threshold – special conditions apply however, so speak to this office for further information.

Note that until the 2015-16 federal budget, this immediate write-off threshold was set at $1,000, which it will revert to after June 30, 2017.

Trading stock
To make the business of running a business even easier, the tax law provides a set of simplified trading stock rules.

Specifically, if your trading stock has not changed in value over the income year, either up or down, by more than $5,000, you can choose not to do an end-of-year stocktake and merely include the same stock value at year-end as at the start of the year. In other words, the closing stock value is taken not to change for the income year.

Prepaid expenses
A small business entity can also get an immediate tax deduction for certain pre-paid business expenses. If a payment covers an expense that is referrable to the next financial year (like insurance premiums, or rent) you can claim that deduction in the current income year. Note however that the “service period” to which the expense applies may need to be limited to 12 months or less, or otherwise the deduction may need to be apportioned over more than one income year.

Car parking and FBT exemption
If you are a small business employer, car parking benefits you provide to your employees are exempt from FBT if all the following conditions are satisfied:

  • the parking is not provided in a “commercial car park”
  • you are not a government body, a listed public company, or a subsidiary of a listed public company
  • you were either a “small business entity” for the last income year before the relevant FBT year, or your total income for the last income year before the relevant FBT year was less than $10 million – for this purpose, your income includes ordinary income and “statutory income”, that is, total gross income before any deductions.

Taking care of your GST obligations can be made less of a headache as well, as eligible businesses (turnover $2 million or less, and using cash basis accounting) are only required to account for GST once payment is received. On top of that, you can also pay GST in quarterly instalments, and the Tax Office will work out for you how much these instalments are. A small business can also, if using some items for private uses, choose to claim the full GST credits and make one single adjustment for the percentage of private use at the end of the tax year.

Another concession available to small business concerns pay-as-you-go income tax instalments, where you can pay a quarterly instalment that is worked out based on your most recently assessed tax return. The quarterly instalment amount is GDP-adjusted, and will save you the time and the effort in having to do the “long form” calculations.

Help for capital gains tax
There are four CGT concessions that may be available to fully disregard or reduce capital gains made by a small business from the disposal of eligible CGT assets, such as a shop or office building used in business. The concessions can also apply to a small business owner disposing of their interest (such as a share in a company).

The four CGT concessions available are:

  1. The 15 year exemption
    Where a taxpayer who is at least 55 years of age and is retiring disposes of a CGT asset that has been owned for a minimum of 15 years.
  2. The retirement exemption
    A taxpayer may exempt a capital gain from the disposal of a CGT asset under the retirement exemption up to a lifetime maximum cap of $500,000. It is not necessary to actually retire and the concession can be utilised more than once up to the cap. A taxpayer under 55 years is only exempt if this is rolled over into a complying superannuation fund.
  3. The 50% active asset reduction
    The capital gain arising from the disposal of a CGT asset may be discounted by 50%, but there are specific rules about what qualifies.
  4. The CGT small business roll-over

A capital gain arising from the disposal of a CGT asset may be deferred provided a replacement asset is acquired within a two year period. The gain is deferred until disposal of the replacement asset.

The small business CGT concessions are complex and contain numerous requirements under each concession. Ask this office for more details if you think these CGT concessions may apply to your situation.