Small Business Tax Concessions
This article will go through small business tax concessions, they are split into the following categories.
- Income tax concessions
- Capital Gains Tax concessions
- Excise concession
- GST concessions
- PAYG instalment concessions
- Fringe Benefits Tax concessions
Are You Classified As A 'Small Business'?
You are a small business if you are an individual (sole trader), a partnership, a company or a trust, which operates a business for all of part of the income year, and make less than $2 million aggregated turnover.
Income Tax Concessions For Small Businesses
The income tax concessions available are the:
- Simpler depreciation rules
- Simpler trading stock rules
- Immediate deductions for prepaid expenses
- Two-year amendment period
Changes for the 2012–13 income year
- The small business instant asset write-off threshold has increased from $1,000 to $6,500
- Small businesses can claim an accelerated initial deduction for motor vehicles acquired in 2012–13 and subsequent years
- The long life small business pool and the general small business pool have been consolidated into a single pool to be written off at one rate
- The entrepreneurs tax offset has been abolished and cannot be claimed.
SIMPLER DEPRECIATION RULES
The simpler depreciation rules are an alternative way of calculating your deductions for most of your depreciating assets. If you use this method you must use all the simpler depreciation rules to calculate deductions for your depreciating assets. The method is as follows:
- Immediately write off most depreciating assets costing less than $6,500
Immediate write-off for assets costing less than $6,500 You can immediately write-off assets which cost less than $6,500 each in the income year that those assets are first used, or installed ready for use. A deduction is allowed only to the extent that you use the asset for an income-producing purpose. This means you will need to apportion your deduction if the asset is not used 100% of the time for income-producing purposes.
- Pool most other depreciating assets
(irrespective of their effective life), such as motor vehicles and computers, in the general small business pool and depreciate at the rate of 30%
- Depreciate most newly acquired assets at 15% in the first year
(regardless of when they were acquired during that year)
There are some assets that you cannot use these simpler rules for, they are the following:
- Assets that you lease out more than 50% of the time
- Horticultural plants, including grapevines
- Buildings and structural improvements to buildings
Deductions for these assets must be calculated using the uniform capital allowance rules.
General small business pool
Most depreciating assets costing $6,500 or more must be allocated to the general small business pool.
There are some exceptions, including all of the following:
- Assets excluded from the simpler depreciation rules - such as horticultural plants and assets let on a depreciating asset lease
- Certain assets in a low-value or software development pool
- Some assets that relate to primary production for which you have a choice
The general small business pool is treated as a single asset. Deductions are calculated by multiplying the pool balance by 30%.
If you acquire a depreciating asset part way through an income year, you can claim a deduction at 15% in that income year. This applies regardless of when during the year you acquired the asset.
Accelerated deduction for motor vehicles
You can also claim an accelerated deduction for a motor vehicle costing $6,500 or more that you start to use, or have installed ready for use, for a taxable purpose. The cost of the motor vehicle is added to the general pool but unlike other assets, the deduction is $5,000 plus 15% of the remaining amount. After the first year, the remaining value of the motor vehicle is depreciated as per the general small business pool rules (that is, at the rate of 30%).
Changes to income-producing percentage
You must monitor the income-producing use of your assets if they are not used only for income-producing purposes. If the income-producing percentage changes by more than 10%, the opening pool balance must be adjusted to reflect the change. You also need to account for changes in income-producing use when you dispose of assets from the pools.
SIMPLER TRADING STOCK RULES
You can choose not to conduct a stocktake and not account for changes in the value of your trading stock if there is a difference of $5,000 or less between the value of your opening stock at the start of the income year and a reasonable estimate of the value of your closing stock at the end of the income year.
When estimating the value of your closing stock you can estimate both the quantity of stock on hand and the value of each item of stock.
If the value of your trading stock varies by more than $5,000, or you choose to account for a change in trading stock, you must apply the ordinary trading stock rules.
If you use the simpler trading stock rules, the value of your closing stock is taken to be the same as your opening stock for that income year. This means that variations in trading stock will not affect the calculation of your taxable income.
If you start your business part way through an income year, you will have no opening stock at the beginning of that year.
The estimated value of your closing stock must be $5,000 or less for you to use the simpler trading stock rules. If it is more than $5,000 you must use the ordinary trading stock rules.
Ordinary trading stock rules
Businesses are ordinarily required to perform a stocktake to work out the value of their trading stock at the end of the income year. Your stocktake result shows the difference between your opening stock and closing stock, and is used when working out your taxable income.
If the value of your closing stock is more than your opening stock, the difference is included as part of your assessable income. However, if the value of your opening stock is more than your closing stock, the difference is your allowable deduction.
IMMEDIATE DEDUCTION FOR SOME PREPAID EXPENSES
The prepayment rules determine how much you can claim in an income year for certain types of prepaid expenses. Generally, the prepayment rules require those types of prepaid expenses to be apportioned over the income years that the goods or services are provided.
A prepaid expense is an expense incurred for goods or services that will not be provided in full within the same income year the expenditure is incurred – for example, a payment made in one income year for rent or interest that is due in the next income year.
Generally, expenses which are affected by the prepayment rules are those general deductions which are necessarily incurred in earning assessable income or in carrying on a business for the purpose of earning assessable income.
If you are a small business you have a choice of how to treat expenses that are affected by the prepayment rules if the expense:
- Would normally be deductible
- Is for goods or services to be provided over a period of 12 months or less, and that period ends in the next income year following the year the expense was incurred. This is known as the 12-month rule.
If the prepaid expense meets these requirements you can either claim an immediate deduction or apportion the expense over the period that the goods or services are provided. The deduction must be apportioned over the period that the goods or services are provided (to a maximum of 10 years)
if the period is either more than 12 months or less than 12 months but ends after the end of the next income year. There are some prepaid expenses that the prepayment rules do not apply to, such as expenses of less than $1,000. These are not required to be apportioned and can be deducted immediately. This is the case even if the expense does not meet the 12-month rule or you are not a small business entity.
TWO YEAR AMENDMENT PERIOD
A small business will generally have a two-year period to request an amendment to their income tax assessment instead of four years. The amendment period starts on the day you get your notice of assessment. This also means the ATO can only amend an assessment to increase or decrease your tax liability within two years after the notice of assessment is issued. There are some exclusions from this shorter period of review, including tax avoidance through fraud or evasion.
Capital Gains Tax (CGT) Concessions
There are four capital gains tax (CGT) concessions you may be eligible for:
CGT 15-year asset exemption
If you are aged 55 or older and retiring or are permanently incapacitated, and your business has owned an asset for at least 15 years, you won’t pay CGT when you sell the asset.
CGT 50% active asset reduction
If you’ve owned an asset to conduct your business (an ‘active asset’) you’ll only pay tax on 50% of the capital gain when you sell the asset.
CGT retirement exemption
If you are aged 55 years or over, you can choose to be exempt from CGT on the sale of a business asset, up to a lifetime limit of $500,000. If you are aged under 55, the capital gain will only be exempt from CGT if paid into a complying superannuation fund or a retirement savings account.
If you sell a small business asset and buy a replacement asset or improve an existing one, you can defer your capital gain until a later year.
You can apply to defer settlement of your excise duty and excise-equivalent customs duty from a weekly to a monthly reporting cycle. If approved, you can then lodge your return and pay your duty liability on or before the 21st day of the following month. To change to a monthly reporting cycle, you must apply in writing to vary your periodic settlement permission (PSP).
There are three goods and services tax (GST) concessions that you may be eligible for:
Accounting for goods and services tax (GST) on a cash basis
You can account for the GST you must pay on sales you make in the same tax period you receive payment for them. Accordingly, you would claim GST credits for the GST you pay in the price of your business purchases in the same tax period that you pay for them.
Paying GST by instalments
You can pay GST by instalments worked out for you by the ATO. You can vary this amount each quarter if you choose.
Annual apportionment of GST input tax credits
If you purchase items that you use partly for private purposes, you can choose to claim full GST credits for these items on your activity statements and then make a single adjustment to account for the private use percentage after the end of your income year.
PAYG Instalment Concessions
If you report and pay PAYG instalments quarterly, you can choose to pay instalment amounts the ATO work out for you. The amount they work out is printed on your quarterly activity statement or instalment notice. This can save you time in working out the amount you need to pay.
You can choose the GDP-adjusted instalment option in your first quarter of the income year (usually, this is the activity statement or instalment notice due in October). Once chosen, that option applies for the whole of the income year. If you choose this option, you must pay the amount shown at label T7 on your activity statement or instalment notice.
From the 2009–10 income year onwards, if you are a full self-assessment (company or superannuation fund) taxpayer that is a small business, you can choose to pay your PAYG instalments using the GDP-adjusted option.
How the ATO work out your instalment amount
The information we use to work out your instalment amount is generally taken from your most recently assessed income tax return. They also adjust your instalment amounts to take expected economy changes (as measured by GDP) into account. If you choose to pay the PAYG instalments the ATO work out, they will calculate your income tax when they process your income tax return.
If the ATO find you have made an overpayment, they will refund it to you, provided you have no other tax debts.
If they find the amount you have paid does not fully cover the tax you must pay, you must make an additional payment to cover the shortfall.
If the instalment amount does not match your expected income tax liability If you believe the instalment amounts the ATO work out will add up to be more, or less, than the total income tax you must pay for the income year, you can: pay the instalment amounts the ATO work out and have any overpayments refunded, or make up any shortfall once your income tax return is processed vary your instalment amounts each quarter work out your PAYG instalment amount yourself using the instalment rate X instalment income option.
Fringe Benefits Tax (FBT) Concession
You may be exempt from fringe benefits tax (FBT) on car parking benefits you provide.
FBT on car parking fringe benefits
You provide a car parking fringe benefit for each day you provide parking for an employee and you meet all of the following conditions:
- a car is parked at premises that you own, lease or otherwise control
- the car is parked for a total of more than four hours between 7.00am and 7.00pm on the day
- either you provided the car or it is owned, leased or otherwise controlled by your employee
- you provide the parking as part of your employee’s employment
- the car is parked at or near your employee’s primary place of employment on that day
- your employee uses the car to travel between home and work (or work and home) at least once on that day
- within a one-kilometre radius of the premises where the car is parked, there is a commercial parking station that charges a fee for all-day parking, which is more than the car parking threshold
- the commercial parking station, at the beginning of the FBT year, charges a representative fee for all-day parking that is more than the car parking threshold.
When car parking you provide is exempt from FBT
Car parking benefits you provide are exempt from FBT if:
- you don’t provide the car parking in a commercial car park
- you aren’t a government body, a listed public company or a subsidiary of a listed public company
- your business was a small business for the last income year before the relevant FBT year (the FBT year is from 1 April to 31 March).
This information has been sourced from the ATO website and is current as of July 2013.