Small business: making tax concessions simple
Simplicity is one of the generally accepted good design principles for tax systems (these really do exist).
At the moment, though, it’s not a hallmark of the Australian system overall.
Statistics from 2010 revealed that across federal and state governments, Australia has 125 different taxes. Of the total tax revenue collected, 90% came from 10 of these taxes.
Furthermore, in 2012 just 0.26% of companies paid 67% of company tax. However, they did not carry 67% of the compliance costs.
Businesses of all sizes face compliance costs. Bigger businesses can afford better tax advice, allowing them to take advantage of concessions in the system and also make sure it’s done right first time.
Small business & tax laws
Smaller businesses don’t have these resources, but they do have the same tax laws.
In recognition of this, the tax laws do provide some concessions for Small Business Entities, with the goal of simplifying their tax affairs.
Tax laws provide some concessions for small business, to help simplify their tax affairs.
They have evolved over time and the main capital gains tax concessions could not be described as simple, but the trade-off is potentially significant tax savings.
Read more: Capital gains tax tips: what concessions can you get?
But what does it mean to be a small business in Australia?
For the tax concessions, broadly speaking, it means that aggregated revenue of the business and other connected businesses is under $2m.
It can be under $2m in the prior year, actually under in the year in question or estimated to be below $2m in the current year, provided it was below $2m in one of the previous two years.
Having now qualified for formal recognition as a Small Business Entity, concessions may be available to the taxpayer at their choice.
Small business & tax concessions
- Simplified trading stock rules. An end of year stocktake isn’t required if the value of trading stock has not moved by $5,000.
- Simplified depreciation. Instant write-off of certain assets and simplified pooled depreciation for all other assets. Pooled depreciation allows assets to be written off at a uniform rate and proceeds from sale reduce the pool balance, instead of calculating profit or loss on sale. Technically the limit instant write-off limit is $6,500, but the Government intends to reduce this amount to the former limit of $1,000 with retrospective effect from 1 January 2014.
- Immediate deduction for prepaid expenses that cover a period of 12 months or less, ending in the next financial year.
- Two-year amendment period. The time limit for review by the ATO of your return is reduced to two years. The limit would otherwise be four years.
Read more: Business tax & why it’s up to you to get it right
The above concessions are available for each year that the taxpayer qualifies. The most common and most useful ones are the depreciation and reduced amendment periods.
The most substantial concession available to SBEs is the CGT Small Business Concessions, which can be a real difference maker.
The most common and most useful concessions are the depreciation and reduced amendment periods.
There are four concessions available to Small Business Entities that trigger a capital gain during the year.
They can substantially reduce tax (sometimes to nil) and also offer an opportunity to substantially boost superannuation savings too. It’s worth noting they are available to other taxpayers that fail the SBE test, but can satisfy a $6m maximum asset value test.
Read more: Tax tips: what you can claim for your small business
The information in this article is for general interest and is not intended as advice. For advice and planning, consult an experienced tax professional.
