Expenses & deductions

Small business concessions

The small business sector has variously been described as the engine room of the economy as well as the biggest employer in the country – and it's not hard to see why. Recent research undertaken by the Council of Small Business Organisations of Australia (COSBOA) showed that small businesses were responsible for generating 5.1 million jobs, or around half of private sector employment. The ATO Tax Commissioner Chris Jordan said that there are about three million small businesses in Australia, including primary production concerns, which represents around 96% of all business.
What is a small business?
The definitions of what constitutes a small business are not consistent however. The Australian Bureau of Statistics defines a small business as having less than 20 employees, while for the purposes of corporations law it is set at fewer than 50. From a tax perspective, the bar is set at having annual turnover of less than $2 million and “carrying on a business”.

The law stipulates that turnover needs to be made from the “aggregated” amounts, which basically means annual turnover (which is gross income, excluding GST) of every “connected” or “affiliated” business, to stop businesses splitting activities so they can slip under the $2 million threshold and gain access to the various tax concessions.

The one thing that everyone agrees on however is the central role that small business plays in the Australian economy. Just how important can be underlined by the fact that the government has seen fit to give the small business sector a break on a range of tax matters. There are several tax concessions that smaller enterprises can take up.
Simplified depreciation
The advantage of this concession is that it is easier to do the depreciation calculations and make adjustments to assets. Simplified depreciation concessions mean that small businesses can immediately write-off assets valued at less than $20,000, which of course can include some big-ticket items as well as assets such as photocopiers, laptops, fridges and desks. Also a business can write-off other assets, or those that are over the $20,000 threshold, in a single depreciation pool at a rate of 30% (15% in the first year).

Note that until the 2015-16 federal budget, this immediate write-off threshold was set at $1,000, which it will revert to from June 30, 2017.
Trading stock
Then, to make the business of business even easier, the tax law provides a set of simplified trading stock rules where, if your trading stock has not changed in value over the tax year, either up or down, by more than $5,000, you can choose not to do an end-of-year stocktake and merely include the same stock value at year-end as at the start of the year – that is, as if no change had occurred.
Pre-paid expenses
A small business can also get an immediate tax deduction for certain pre-paid business expenses. If a payment covers an expense that goes over into the next financial year (like insurance premiums, membership to an organisation like Taxpayers Australia, or rent) you can claim that deduction in the current income year.

Car parking and FBT exemption
If you are a small business employer, car parking benefits you provide are exempt if all the following conditions are satisfied:

• the parking is not provided in a commercial car park
• you are not a government body, a listed public company, or a subsidiary of a listed public company
• you were either a small business entity for the last income year before the relevant FBT year, or your total income for the last income year before the relevant FBT year was less than $10 million – for this purpose, your income includes ordinary income and “statutory income”, that is, total gross income before any deductions.

GST and PAYG
Taking care of your GST obligations can be made less of a headache as well, as eligible businesses are only required to account for GST once payment is received (with cash basis accounting). On top of that, you can also pay GST in instalments, and the Tax Office will work out for you how much the instalments are. A small business can also, if using some items for private uses, choose to claim the full GST credits and make one single adjustment for the percentage of private use at the end of the tax year.
Another concession available to small business concerns pay-as-you-go tax instalments, where you can pay a quarterly instalment that is worked out based on your most recently assessed tax return. The income recorded there is adjusted to align with the latest increase in gross domestic product, and will save you the time and the effort in having to do the 'long form' calculations.
Help for capital gains tax
There are four CGT concessions that may be available to eliminate or reduce capital gains made by a small business. The Tax Office has provided a handy summary here for all the small business concessions. The four CGT concessions are:

1. The 15 year exemption.
   Where a taxpayer who is at least 55 years of age and is retiring disposes of a CGT asset that has been owned for a minimum of 15 years.
2. The retirement exemption.
   A taxpayer may apply capital proceeds from the disposal of a CGT asset to the retirement exemption, up to a lifetime maximum of $500,000 – as it is not necessary to actually retire, the concession can be utilised more than once. A taxpayer under 55 years is only exempt if this is rolled over into a complying superannuation fund.
3. The 50% active asset reduction.
   The capital gain arising from the disposal of a CGT asset may be discounted by 50%, but there are specific rules about what qualifies.
4. The CGT rollover.
   A capital gain arising from the disposal of a CGT asset may be deferred provided a replacement asset is acquired within a two year period – the gain is deferred until disposal of the replacement asset.