Tax concessions for small business entity
From a tax planning perspective, eligible small business entities have been able to access numerous tax concessions in recent years which have provided either tax relief and/or simplified tax compliance. Following the enactment of the Treasury Laws Amendment (Enterprise Tax Plan) Act 2016 on 19 May 2017, access to most of these concessions has been expanded for the year ended 30 June 2017 onwards, thereby increasing their potential value to eligible small to medium sized enterprises.
This correspondence sets out the key tax concessions available to an eligible small business entity which carries on a business whose aggregated turnover is less than $10 million for the year ended 30 June 2017.
However, it is important to note that the eligibility criteria to access the small business CGT concessions remains unchanged, including the requirement that a business taxpayer have an aggregated turnover of less than $2 million where the $6 million maximum net asset value test is not met.
Furthermore, there is a separate $5 million aggregated turnover threshold for an individual carrying on a business via an unincorporated entity which must be met for an individual to access the small business tax offset for the year ended 30 June 2017 and in subsequent years.
Each of these categories of concession are discussed further below.
General definition of small business entity
The first issue to consider is whether an entity that would be regarded as a small business entity as defined under section 328-110 of the Income Tax Assessment Act 1997 (the ITAA 1997) for the purposes of the concessions other than the small business CGT concessions and the small business offset.
An entity is a small business entity under section 328-110 if it:
- carries on a business
- satisfies the $10 million aggregated turnover test.
Broadly, an entity can satisfy the $10 million aggregated turnover test if the total annual turnover for the entity, its affiliates and entities connected with it is not more than $10 million.
For these purposes, an entity’s annual turnover is broadly the total ordinary income that the entity derives in the ordinary course of carrying on a business and excludes Goods and Services Tax (GST) and income derived from the sale of retail fuel.
In calculating an entity’s $10 million ‘aggregated’ turnover it will be necessary to not only include the entity’s annual turnover but also the annual turnover of any entity which was an affiliate or a connected entity of the taxpayer for the year being tested.
Very broadly, an affiliate includes an individual or company that acts in accordance with the wishes and directions of the entity, or who acts in concert with the entity in relation to the business of the individual or the company. By contrast an entity will be connected with another entity if either entity controls the other entity, or both entities are commonly controlled by a third entity. A taxpayer will generally control another entity where the taxpayer and/or the taxpayer’s affiliates directly or indirectly beneficially own at least 40% of any right to be distributed income or capital by that entity.
Where an entity is eligible to be regarded as a small business entity, it will be able to potentially utilise the tax concessions detailed below, provided it also satisfies any additional criteria that may separately apply to each concession.
Outline of small business entity concessions
As set out in the Explanatory Memorandum to the Treasury Laws Amendment (Enterprise Tax Plan) Act 2016 the following 10 concessions are potentially available to any entity which is regarded as a small business entity.
- Simplified depreciation rules
Small business entities have an option to deduct amounts for most of their depreciating assets under the ‘small business capital allowance’ regime to the extent that the assets are used for a taxable purpose.
In general, a small business entity can:
- immediately write off most depreciating assets costing less than $20,000 for expenditure incurred from 12 May 2015 in the year in which such assets are used or installed ready for use for a taxable purpose provided this occurs before 30 June 2018
- pool most other depreciating assets (irrespective of their life) in the general small business pool and depreciated on a diminishing value basis at a rate of 30%, and depreciate additions to that pool at 15% for the first year (regardless of when those assets were acquired during the year)
- immediately write off the balance of pooled assets where it is less than $20,000 provided this occurs in the year ended 30 June 2017 or 30 June 2018.
- Prepaid Expenses
Small businesses can claim an immediate deduction for prepaid expenses for a service period of 12 months or less, which ends in the following income year. For example, prepayments of subscriptions to professional associations, rent or insurance payments are immediately deductible.
- Simplified trading stock rules
Provided that the difference between the value of the opening trading stock and the estimated closing stock of the small business is $5,000 or less, a small business entity does not have to account for changes in the value of the trading stock. Otherwise, the entity must conduct a stock take and account for changes in value at the end of the income year.
- Immediate deductibility of start-up expenses
Very broadly, certain start-up costs being business capital expenditure incurred in relation to a proposed business can be written off as an immediate deduction by a small business entity under section 40-880(2A) of the ITAA 1997. Such expenses include the cost of obtained legal or accounting advice as to how the proposed business may be structured or operated as well as certain fees charged by an Australian government agency in relation to establishing the proposed structure.
- Pay As You Go (PAYG) instalment amounts
Small businesses will be eligible to calculate PAYG instalments based on the gross domestic product (GDP) adjusted notional tax method for cost and time-saving purposes.
- Goods and Service Tax (GST) cash accounting
A small business entity can opt to account for GST on a cash basis rather than an accrual basis.
- GST and annual private apportionment
When claiming GST input tax credits for business assets, a small business entity does not have to estimate how much it intends to use the assets for private purposes. Instead, it is required to make a single adjustment after the end of the income year to account for private use.
- GST instalments
Small business entities can choose to pay GST by instalments and lodge a GST return annually. Depending on the nature of the business, the frequency of the instalment payments may be four quarterly instalments in an income year.
- Fringe benefits tax (FBT)
Small business entities can access the FBT car parking exemption provided that the car parking is not provided in a commercial car park from 1 April 2017.
- Small business restructure rollover relief
Optional rollover relief is available under Subdivision 328-G of the ITAA 1997 where a small business entity transfers an active asset of the business (e.g. goodwill) to another small business entity as part of a genuine business restructure on or after 1 July 2016 where there has been no material change in the underlying economic ownership of assets. The effect of the rollover is to defer any gain or loss arising from the transfer of active assets that are CGT assets, depreciating assets, trading stock or revenue assets where all the requirements of Subdivision 328-G are satisfied.
Apart from the above concessions it should also be noted that the company tax rate will be reduced from 28.5% to 27.5% for tax year ended 30 June 2017 for a company which qualifies as a small business entity, being a company that carries on a business and whose aggregated turnover is less than $10 million for the tax year ended 30 June 2017. This has also resulted in changes to the maximum franking credit which can be attached to a franked dividend in certain circumstances.
Small business CGT concessions
Whilst access to the above concessions has been broadened to apply to a small business entity whose aggregated turnover was less than $2 million to a less than $10 million threshold from the year ended 30 June 2017 there was no change to the aggregated turnover threshold of a small business entity wishing to apply the small business CGT concessions under Division 152 of the ITAA 1997.
Accordingly, an entity will only be able to satisfy the basic eligibility conditions of Division 152 for the year ended 30 June 2017 where it is a ‘CGT small business entity’ being a small business entity whose aggregated turnover is less than $2 million in the year in which the entity triggers the capital gain.
Very broadly, where a taxpayer cannot satisfy the $6 million maximum net asset value test it will alternatively be able to potentially claim the small business CGT concessions if it is a CGT small business entity and the following ‘basic conditions’ have been satisfied:
- the capital gain relates to an active asset used in carrying on a business
- the active asset has been used in carrying on a business for at least half the ownership period where it has been held for less than 15 years, or for at least seven and a half years where it has been owned for 15 years or more
- certain additional conditions are satisfied where the CGT asset is either a share in a company or an interest in a trust.
Where these basic conditions are met a taxpayer can potentially access the small business CGT concessions, although additional conditions must be met if certain concessions are claimed by the taxpayer.
The four small business CGT concessions comprise:
- the 15-year exemption
- the active asset 50% reduction
- the retirement exemption
- the small business rollover.
Further details on each of these concessions is provided below
- 15-year exemption
An individual taxpayer satisfying the basic conditions can disregard a capital gain under the small business 15-year exemption if that person also owned the asset continuously for 15 years and was aged over 55 and was either retiring or permanently incapacitated. Companies and trusts will similarly be able to disregard a gain where the basic conditions are met, the relevant active asset has been held continuously for at least 15 years, the company or trust had a significant individual for at least 15 years and there was a significant individual of the company or trust just before the CGT event who was over 55 and retiring or permanently incapacitated. Where this concession is available there is no need to reduce the capital gain by capital losses or apply the CGT Discount or other small business CGT concessions.
- Active asset 50% reduction
The small business 50% active asset reduction is available if the basic eligibility conditions to claim the small business CGT concessions are satisfied as there are no additional eligibility conditions which must be met in applying this concession. The concession operates on the basis that any gross capital gain must first be reduced by capital losses. The resulting capital gain (if any) is then reduced by the CGT Discount (if applicable). Any remaining balance of the capital gain is then reduced by 50% under the active asset reduction. Broadly, the application of this concession can also be used in combination with the CGT retirement exemption and small business replacement asset rollover.
- The retirement exemption
If the basic conditions are met, an individual taxpayer may choose to disregard a capital gain under the CGT retirement exemption up to a lifetime CGT retirement exemption limit of $500,000 where that individual is aged 55 or over. However, where such a taxpayer is aged less than 55 at the time of choosing the concession the amount of any exempted gain up to the above $500,000 threshold must be paid to a complying superannuation fund or retirement savings account. In addition, a company or a trust can also choose to claim the retirement exemption. However, in these circumstances it will also be necessary to ensure that the significant individual test is satisfied just before the CGT event occurs, and that the amount of any gain is paid by the company or trust directly to the CGT concession stakeholders of the company or trust who will be subject to the above rules concerning the $500,000 retirement exemption.
- Small business rollover
Where the basic conditions are met a small business entity can also choose to indefinitely defer a capital gain if it applies the small business replacement asset roll-over. Where an entity chooses this concession it must acquire replacement active asset(s) and/or improve existing active asset(s) within two years of the sale of the active asset. If this does not occur, a capital gain will arise to the extent that the deferred capital gain is not applied to acquire replacement and/or improved active asset(s) within two years from the date of sale of the active asset.
- Concession for superannuation contributions
Contributions arising from the disposal of assets that qualify for the 15-year CGT exemption and the $500,000 CGT retirement exemption under the small business concessions may be contributed to a complying superannuation fund without breaching the non-concessional contributions cap provided they do not exceed a combined lifetime CGT cap amount which increased is $1,395,000 for the 2015/16 tax year.
Small business tax offset
The small business tax offset is a non-refundable tax offset of the income tax payable by an individual on any net small business income which is included in that individual’s taxable income. The offset is available not only when an individual is a small business entity but also where an individual is a beneficiary of a trust or a partner in a partnership which is an eligible small business entity.
From 1 July 2016 the small business tax offset for unincorporated businesses increased from 5% to 8%, and the eligibility threshold enabling individuals deriving net small business income to apply the tax offset increased to a less than $5 million aggregated turnover threshold.
However, the amount of any such offset remains capped at an annual maximum amount of $1,000 for each individual in respect of the aggregate amount of any net small business income derived whether directly or indirectly via a partnership or a trust.
Given the above concessions, there may be substantial benefits potentially available to your business if you are eligible to be a small business entity, and we would be pleased to meet with you to identify any of the benefits potentially available.
If you would like to discuss how the small business tax concessions may affect your business or have any further queries, please do not hesitate to contact us.