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
GST and PAYG
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:
- 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.
- 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.
- 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.
- 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.
This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2014 Moore Stephens Australia Pty Limited. All rights reserved.