The question may sound a little silly, but in the eyes of the ATO, it’s an important factor when working out concessions and other tax benefits that will affect your small business. Research by the Council of Small Business Organisations of Australia (COSBOA) showed that Australian Small Business make up around 5.1 million jobs. The Australian Taxation Office (ATO) recognises around 3 million small businesses operating in Australia. There’s no doubt small business has a great impact on the Australian economic landscape.
What Is A Small Business?
The ATO has criteria that determine if your business falls into the ‘Small Business’ category. A small business can be an individual (sole trader), partnership, company or trust that carries on a business and has an aggregated turnover of less than $10 million.
What Is Aggregated Turnover?
The ATO uses aggregation to determine your annual turnover. Annual turnover is all of the ordinary income you have earned in the ordinary running of your business for the income year. Aggregated turnover is generally your business turnover plus the annual turnover of any business connected with you or is an affiliate of your business.
Your business annual turnover +
the annual turnover of any entity connected with your business +
the annual turnover of an affiliate business =
your businesses aggregated turnover for the income year.
Why Is This Important To Know?
The 2020/21 Australian Federal Budget was handed down on 6 October 2020 and included a range of measures to stimulate Australian businesses and jobs. These included items such as the temporary loss carry-back for businesses and a new and improved instant asset write off and directly affect small business. These schemes are only available to businesses that calculate their aggregated turnover of less than $5 billion.
Loss Carry Back
The temporary loss carry back was announced to provide cash relief for small businesses that are in a tax loss position due to Covid-19 and/or to obtain faster tax deductions for depreciating assets under the instant asset write-off measures. The loss carry back scheme is operated as a refundable tax offset. A company can choose whether to carry the loss back or forward.
Small businesses with an aggregated turnover of up to $5 billion will be able to carry back tax losses made in the 2019-20,2020-21 and 2021-22 income years to be offset against tax paid in the 2018-19 or later income years. The claimable amount is capped at the franking account surplus at the end of the year in which the loss claim is made.
Pro Tax Tip: The offset can only be claimed when lodging the tax return for your business in the 2020-21 or 2021-22 income years.
Only corporate tax entities can claim the temporary loss carry back. There is no relief for individuals or other entities.
Instant Asset Write Off
The Instant Asset Write Off is a great way for businesses to claim the immediate tax deduction of the business portion of an asset in the year in which it is installed or first used.
Pro Tax Tip: Multiple assets (if the cost of each asset is less than the threshold) as well as new and second-hand assets can be claimed. Your business is not eligible if you have an aggregated turnover of $500 million or more.
Simplified depreciation rules apply for assets claimed and cannot be used for assets that are excluded from the rules. The rules and criteria have changed over time. It’s best to have a chat with a tax accountant before you purchase and make sure if your business qualifies.
There have been recent changes made to the rules and exclusions governing the instant asset write off, and the threshold amounts raised due to Covid-19.
Assets first used or installed for first use between 12 March 2020 and until 30 June 2021 and purchased by 31 December 2020 the threshold amount for each asset is $150,000 (up from $30,000) for businesses with an aggregated turnover of less than $500 million (up from $50 million) qualify.
Temporary Full Expensing
New temporary expensing rules provide small businesses with an annual aggregated turnover of up to $5 billion with an immediate tax deduction for 100 percent of the cost of eligible depreciating assets first held or installed ready for use between 6 October 2020 and 30 June 2022.
Pro Tax Tip: Corporate tax entities unable to meet the $5 billion turnover test may still be eligible for temporary full expensing under the alternative test.
There are exclusions on assets. This rule does not include assets allocated to the low-value pool or a software development pool. Water facilities, fencing, plants or fodder storage assets also do not qualify. Building and other capital works or assets that will never be located in Australia or used principally in Australia will not qualify.
Capital Gains Tax (CGT) Concessions
Australian small business are eligible for a range of tax concessions on capital gains on the disposal of business assets and can significantly reduce the CGT payable on the sale of a business. These concessions combined with the 50% general CGT discount may reduce your CGT bill to nil.
The concessions, which may be relevant to your small business, include:
- 15 year exemption – available when a taxpayer is 55 years or older and is retiring
- 50% active assets reduction – the capital gain that arises from the disposal of the CGT asset may be discounted by 50%, however they are rules and criteria that apply
- Retirement exemption – a taxpayer may apply capital proceeds from the disposal of a CGT asset to the retirement exemption
- Small business roll-over – the CGT asset may be deferred provided a replacement asset is acquired within a two year period.
Pro Tax Tip: Your small business must meet a $6 million net asset test or a $2 million turnover test before you can claim these concessions.
Goods and Services Tax (GST) and Excise Concessions
Your small business may be eligible for GST and excise concessions and defer settlements on your excise duty and excise equivalent customs duty from a weekly to a monthly reporting cycle. If approved you can lodge your excise return and pay your duty liability on or before the 21st day of each month.
Once your small business earns and annual turnover of $75,000 or more, you’ll be required to collect and pay GST as well as lodge a BAS. You’ll also be able to claim back GST credits on purchases made.
Eligible Small Business Tax Deductions
Don’t forget about the tax deductions you can make as a part of running and operating your small business. It pays to know what you can claim. Small amounts do add up, and this is where the worth of your tax agent blooms into real savings. Don’t forget deductions, such as:
- Advertising, graphic design and marketing – costs and consultants
- Legal costs, registration fees, valuation costs, fees to guarantee commissions paid
- Sponsorships and gifts – make sure your donation is through a registered DGR
- Bad debts – bad debts are an allowable tax deduction as long as it was included as assessable income
- Interest – interest you have to pay as part of a business loan can be claimed
- Travel – you can claim the business portion of your travel costs, such as plane and taxi costs, accommodation and meals
- Car and vehicle expenses – keep a logbook and claim maintenance, fuel, cleaning and wear and tear
- Home Office – many small business owners work from a home office. Claim on utilities, stationery, computers, software, desk and chairs to name a few.
Pro Tax Tip: Make sure you keep all receipts and tax invoices. The ATO can ask to see your documents 5 years after you lodge your tax return.
ITP The Income Tax Accounting Professionals have helped Australian individuals and businesses for 50 years. There’s not a lot we don’t know about tax. Phone 1800 367 487 and chat about your businesses tax needs and how we can help you save on your tax dollar.