In this edition, we are going to discuss the major small business tax concessions. Before giving the details, I like to define what a small business is, according to the ATO website.
From 1 July 2016, you are a small business entity if you are a sole trader, a partnership, a company or a trust that:
- operates a business for all or part of the income year, and
- has an aggregated turnover less than $10 million
However, to make things more complicated, the ATO describes some exceptions to the small business tax concessions. Briefly, to be eligible for small business income tax concessions, the aggregated turnover cannot be higher than $5 million.
On top of that, the small business CGT concessions are only available if your aggregated turnover is below $2 million.
Let's start with small business income tax concessions. These are more relevant, in other words easily applicable, to the small and micro businesses who report their figures on cash basis.
The first item is almost the most popular one: Simplified Depreciation Rules - Instant Asset Write-off.
- At the moment, after the latest announcements, the small businesses can write-off the value of the assets they purchased in the first year, if the item was purchased between 12 March 2020 and 31 December 2020, for less than $150,000 (excluding GST).
- However, the depreciation of the cars is limited by the car limit, which was $57,518 for 2020 financial year and $59,136 for 2021 financial year.
- For the items that cost you more than $150,000, accelerated depreciation is available, which allows the businesses to claim either 57.5% or 50% in the first year, depending on the depreciation method they use.
Secondly, the small businesses are allowed to deduct the establishment expenses immediately, which was originally claimed in 5 years.
- From 1 July 2015, small businesses are entitled to certain deductions when starting up a small business. The range of deductible start-up costs includes professional, legal and accounting advice and government fees and charges.
Thirdly, the small businesses are allowed to choose not to conduct a stocktake, if there is a difference of $5,000 or less between opening stocks, in the beginning of the financial year and closing stocks at the end of the same financial year.
There are also Capital Gains Tax concessions available to the small businesses.
The first item on our list is Small Business Restructure Rollover.
- From 01 July 2016, small businesses can change the legal structure of their business without incurring any income tax liability when active assets are transferred by one entity to another.
- This rollover applies to active assets that are CGT assets, trading stock, revenue assets and depreciating assets used, or held ready for use, in the course of carrying on a business.
The second type of concession is 15 Year Retirement Exemption.
- If taxpayer is aged 55 or older and retiring or are permanently incapacitated, and the taxpayer owned an active business asset for at least 15 years, there is no CGT to pay when the asset is disposed by sale, gift or transfer.
- Amounts from this exemption may be able to be contributed to the super fund without affecting the non-concessional contributions limits.
There is also a 50% active asset reduction available for small businesses.
- If the taxpayer owned an active business asset, a 50% discount is applied on the capital gain when the asset is disposed.
The third concession is the retirement exemption.
- Very briefly, the taxpayer may choose to disregard all or part of a capital gain under the small business retirement exemption if certain conditions are satisfied. If the taxpayer is an individual who chooses the retirement exemption, he/she doesn't need to terminate any activity or cease business. This concession allows the taxpayer to provide for the days of retirement. If the taxpayer is a CGT concession stakeholder and receives payments under the retirement exemption, there is not requirement to terminate your employment.
Lastly, the rollover exemption allows small businesses to defer the capital gain until a year, when they dispose of an active asset and buy a replacement asset, or improve an existing one.
- The replacement asset can be acquired one year before or up to two years after the last CGT event in the income year for which you choose the roll-over.
As the reader can imagine, this is just a summary of the available concessions. More detail can be found on ATO website, www.ato.gov.au, or by contacting our office.