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 shows that small businesses were responsible for generating around half of private sector employment.

The Tax Commissioner Chris Jordan says that there are about three million small businesses in Australia, including primary production businesses, which represents around 96% of all business.

What is a “small business”?

The definitions of what constitutes a small business are not consistent however. The Australian Bureau of Statistics defines a small business as having less than 20 employees, while for the purposes of corporations law it is set at fewer than 50. From a tax perspective, the bar is set at having annual turnover of less than $2 million and “carrying on a business”.

The law stipulates that turnover (which is gross income, excluding GST) needs to be the “aggregated” amounts, which means from every “connected” or “affiliated” business, to stop businesses splitting activities so they can slip under the threshold.

The one thing that everyone agrees on however is the central role that small business plays in the 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.

Simplified depreciation

The advantage of this concession is that it is easier to do the depreciation calculations and make adjustments to assets. Simplified depreciation concessions mean that small businesses can:

• immediately write-off depreciating assets valued at less than $6,500, such as photocopiers, laptops, fridges and desks
• immediately write-off up to $5,000 for motor vehicles acquired after July 1, 2012, with the remainder to be written-off at a rate of 15% in the first year and 30% in following years*, and
• write-off other assets in a single depreciation pool at a rate of 30% (15% in the first year).

* If the vehicle costs less than $6,500, the full cost can be immediately written off as per the first point.

Note however that these measures were introduced as part of the introduction of the Minerals Resource Rent Tax (MRRT, or “mining tax”). The proposed repeal of the MRRT means that some of these simplified depreciation measures may be abolished in their current form. They are also likely to be retrospective and mainly date back to January 1, 2014. Ask this office for updates.

Trading stock

To make the business of business even easier, the tax law provides a set of simplified trading stock rules where, if your trading stock has not changed in value over the tax 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 – that is, as if no change had occurred.

Pre-paid expenses

A small business can also get an immediate tax deduction for certain pre-paid business expenses. If a payment covers an expense that goes over into the next financial year (like insurance premiums, membership to an organisation, or rent) you can claim that deduction in the current income year if the period of service is 12 months or less.

Car parking and FBT exemption

If you are a small business employer, car parking benefits you provide are exempt if all the following conditions are satisfied:

• it 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 that year was less than $10 million – for this purpose, your income includes ordinary income and “statutory income”, that is, total assessable income before any deductions.

Goods and services tax

Eligible businesses are only required to account for GST once payment is received (with cash basis accounting). You can also pay GST in instalments and, if using some items for private use, choose to claim full GST credits and make one single adjustment for the percentage of private use at the end of the tax year.

Another concession available concerns pay-as-you-go tax instalments, where you can pay a quarterly instalment that is worked out based on your most recently assessed tax return. The income recorded is adjusted to align with the latest increase in gross domestic product, saving time having to do  calculations.

Help for capital gains tax

There are four CGT concessions that may be available to eliminate or reduce capital gains made by a small business.

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 apply capital gains from the disposal of a CGT asset to the retirement exemption, up to a lifetime maximum of $500,000 – as it is not necessary to actually retire, the concession can be utilised more than once. A taxpayer under 55 years is only exempt if this is rolled over into a complying super fund. A company or trust also qualifies if it pays the capital gain to a “CGT concession stakeholder” or their super fund.

3.    The 50% active asset reduction.

The capital gain arising from the disposal of a CGT asset may be discounted by 50% (on top of the general 50% discount accessible to individuals and trusts).

4.    The CGT 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.

One of the alternative conditions of eligibility for these concessions is to pass a “maximum net asset value test”. There is a limit of $6 million on the net value of the CGT assets that you and certain related entities can own and still qualify. It is not indexed for inflation.

You satisfy the maximum net asset value test if the total net value of CGT assets owned by you and those related entities does not exceed $6 million just before the CGT event that results in the capital gain for which the concessions are sought. If you fail it, you may still get the concessions under other tests.

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