Small business tax concessions are an important feature of the Australian tax system.
Small Business Tax Concessions
Australia has a wide range of small business tax concessions assisting small business at different stages of their life cycle. Here is a summary of the top 21.
# 1 Lower Company Tax Rate
Base rate entities are companies whose aggregated annual turnover is below a certain threshold. That threshold is changing over time. As is the company tax rate for base rate entities, which makes it so confusing.
The threshold was $2m for 2015/16, then $10m for 2016/17, then $25m for 2017/18 and is now $50m going forward.
The tax rate for base rate entities was 28.5% for 2015/16 and is now 27.5% until 30 June 2020. For 2020/21 it will be 26%. And after that settle at 25%.
# 2 Income Tax Offset
Tax rates for companies peak at 30% while individual tax rates go up to 45%. This puts unincorporated small business at a disadvantage. The small business income tax offset is to change that. It gives eligible small business a discount on their income tax payable.
The offset is currently 8% until 30 June 2020, will increase to 13% in 2020/21 and then go up to 16% after that. The offset has a $1,000 cap per individual for each income year.
# 3 CGT Concessions
The small business CGT concessions are probably the most ‘expensive’ small business tax concession in Australia. Meaning this is where we as a nation spend most money on.. The threshold to qualify is net assets of $6m or less or an annual turnover of less than $2m.
a) 15-Year: Capital gains on active assets might be exempt from CGT. The taxpayer must have held the assets continuously for 15 years. And must have reached the age of 55 and retire. Or be permanently incapacitated.
b) 50%: A 50% reduction of capital gains that arises from the sale of active small business assets (in addition to the general CGT discount).
c) Retirement: Capital gains from the sale of active assets are exempt where the proceeds of the sale are used for retirement. The exemption has a lifetime cap of $500,000.
d) Roll-over: There is CGT roll-over relief for capital gains arising from the disposal of active small business assets. One condition is that the proceeds of the sale are used to purchase other active small business assets.
# 4 Instant Asset Write-off
Small business entities can immediately deduct assets that cost less than a threshold amount. From 12 May 2015 until 30 June 2019, the threshold is $20,000. Small businesses qualify if they have an aggregated annual turnover of less than $10m.
# 5 Simplified Depreciation
Assets above the threshold for an instant asset write-off can be depreciated through simplified pooling arrangements. The rate is 30% per year (15% in the first year).
Once the value is less than the instant asset write-off threshold (before deducting depreciation for the year), you can deduct the entire remaining balance in one hit.
# 6 Refundable R&D Tax Incentive
Companies with an aggregated annual turnover below $20 million receive a refundable R&D offset. The refundable offset is 13.5 percentage points above a claimant’s company tax rate. Cash refunds from the refundable R&D tax offset have a cap of $4 million per annum.
R & D tax offsets that cannot be refunded will be carried forward as non-refundable tax offsets to future income years.
# 7 Restructure Roll-over Relief
Owners of small business active assets are eligible for CGT and income tax roll-over relief for a ‘genuine restructure’ of their business. One condition is that the underlying economic ownership of the assets must not change. The roll-over is available for businesses with an aggregated annual turnover of less than $10m.
# 8 Immediate Deduction For Professional Expenses
Small business entities can immediately deduct a range of professional expenses associated with starting a new business. Examples are professional, legal and accounting advice. Previously, these professional costs were able to be deducted over a five year period.
To qualify a small business must have an aggregated annual turnover of less than $10m.
# 9 Simplified Trading stock rules
Small business entities with an aggregated annual turnover of less than $10m may choose to use a simplified trading stock regime. They may choose not to account for the changes in the value of stock for an income year. One condition is, though, that the difference between the opening balance and a reasonable estimate of the closing balance does not exceed $5000.
# 10 Immediate Deduction Of Prepaid Expenditure
Small businesses may immediately deduct prepaid expenditure for certain passive investments subject to specific rules and conditions.
# 11 Debt and Equity Carve-Out
If a company has a turnover of less than $20 million, there is a carve-out. It means related party ‘at call’ loans still count as a debt interest and not an equity interest.
# 12 Adjustment Of PAYG I
Small businesses can elect to have their PAYG instalments calculated for them by the ATO by applying an adjustment to previously reported information.
# 13 Two-year Amendment
A small business entity will generally be eligible for a two-year amendment period for tax assessments instead of the standard four years.
# 14 Exempt From Car Parking FBT
Car parking benefits provided to employees of small businesses are exempt from FBT if employers do not provide parking in a commercial car park. The employer must not be a government body, listed public company or subsidiary of a listed public company. And the employer’s total income must be less than $10m.
# 15 Exempt from FBT on Multiple Portable Electronic Devices
An FBT exemption applies to multiple work-related portable electronic devices provided by a small business to its employees. This applies even if the devices have substantially identical functions. This exemption applies to portable electronic devices mainly for use in the employee’s employment.
# 16 Simplified GST
Small businesses have the option to:
- Account for GST on a cash basis, rather than accrual
- Pay GST by quarterly instalments and to lodge an annual return
- Lodge a simplified business activity statement to report GST
- Apportion GST input tax credits on an annual basis for acquisitions and importations that are partly creditable.
In addition, businesses (other than providers of taxi or limousine services) do not have to register for GST if their turnover is less than $75,000.
# 17 Free Super Clearing House
A free superannuation clearing house service is available to businesses with aggregated turnover of less than $10m or where the business has 19 or fewer employees.
# 18 Defer Settlement for Excise
Eligible businesses can apply to defer settlement of excise duty and excise equivalent customs duty from a weekly to monthly reporting cycle.
# 19 Early-stage Incentives
Investors in ‘early-stage’ innovation companies receive a tax offset of 20% of the investment up to $200,000. They also receive a CGT exemption where the shares are held for more than 12 months.
# 20 Employee Share Scheme
To incentivise employees of start-up companies, shares provided under an ‘employee share scheme’ to an employee of an unlisted start-up company with a turnover of less than $50m receive concessional tax treatment.
This enables employees to share in, and benefit from, the future growth of the business and allows small business owners to invest more of the company’s cash in growing the business.
# 21 Thin Capitalisation
Entities whose total debt deductions are less than the de-minimise threshold of $2 million for the income year are exempt from the thin capitalisation rules.
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