Small businesses may be eligible for various tax concessions, both as an operating entity and on disposal of a business. These concessions can boost cash flow year-to-year and significantly reduce, or even eliminate, the tax payable on a business exit. Being aware of these concessions can help your business make better asset investments and business restructuring decisions. This article sets out and explains the categories of unique small business tax concessions.
Defining ‘Small Business’
Firstly, to be eligible for small business tax concessions, you must be a ‘small business’. Generally, this means your aggregated turnover must be less than:
- $10 million (for all small business purposes other than the small business capital gains tax concessions); or
- $2 million (for small business capital gains tax purposes).
However, some concessions have additional eligibility requirements, which we discuss below.
Types of Concessions
There are six broad categories of small business tax concessions.
1. Income Tax Concessions
|Start-up professional expenses||
This allows a small business to fully deduct ‘professional expenses’ from its assessable income.
These expenses relate to obtaining advice on business structuring that would otherwise be deductible over five years. They also include costs for lawyers or accountants.
|Small business restructure rollover||This allows a small business to transfer assets from one entity to a related entity, without triggering a tax liability.|
|Trading stock rules||This allows a small business to use a simplified stocktake, by estimating the value of trading stock at the end of the financial year.|
|Immediate deductions for prepaid expenses||Small businesses can claim a full deduction if the service period for the prepaid expenditure does not exceed 12 months.|
2. Fringe Benefits Tax
Employers pay fringe benefits tax (FBT) on any benefits it gives to its employees. It usually refers to cars, car parking and other private expenses. These fringe benefits may be in addition to, or a part of, the employees’ salary package.
A small business with a turnover of up to $10 million is exempt from paying FBT on the following two common fringe benefits.
|FBT car parking exemption||A small business employer is exempt from FBT for providing a car park to its employees, if the parking is not in a commercial car park.|
|FBT work-related devices exemption||
Small businesses are exempt from paying FBT on devices provided to employees that are primarily used for work.
These devices include:
These are in addition to the general concessions and exemptions provided to all businesses.
3. Capital Gains Tax
A small business with an aggregated turnover of $2 million is eligible to access the following capital gains tax (CGT) concessions.
|The 15-year exemption||This provides a complete exemption from CGT where a business has operated for at least 15 years (among other criteria).|
|50% active asset reduction||This operates in addition to the general 50% CGT discount. Consequently, it allows for a combined 75% reduction in the gross capital gain.|
|Small business retirement exemption||This lets eligible taxpayers reduce their capital gain up to the $500,000 lifetime limit. However, individuals under 55-years-old must contribute the exempted amount to a complying superannuation fund.|
|Small business rollover relief||This concession provides an automatic two-year tax deferral. This means that the business may acquire a replacement active asset and the capital gains taxing point will be deferred to the time when the replacement asset is disposed.|
Businesses eligible for the 15-year exemption or the retirement exemption can choose to contribute the exempted amount to a certain owner’s superannuation fund. This will not count towards the ordinary superannuation contribution caps.
Tip: In addition to the above CGT concessions, a small business can access concessions available to all businesses.
4. Goods and Services Tax
Goods and Services Tax (GST) is a levy that applies to most goods and services. The GST-related concessions are aimed at making tax-reporting less onerous and more flexible for small businesses.
|Accounting for GST on a cash basis||
A small business can account for GST on its business activity that covers the period of sales and purchases.
It can also claim any GST credits in the same tax period.
|Paying GST by instalments||A small business can pay GST by instalments chosen by the Australian Taxation Office (ATO).|
|Apportionment of GST input tax credits||A small business can claim full GST credits for items that are purchased and partly used for private purposes.|
Excise duty is a commodity-based tax for producing and manufacturing alcohol, tobacco and fuel.
The excise concession allows a small business to change the reporting and payment of excise duty from weekly to monthly. As a result, this reduces the reporting cycle from 52 times a year to 12 times a year.
5. Pay As You Go (PAYG) Installment Concession
Small businesses have an option to PAYG by installments.
These installment figures are calculated by the ATO and can be varied each quarter. They are based on previous business reports and adjustments are based on projected growth.
6. Superannuation Concession
Finally, as an employer, you have to make superannuation contributions to your employees if you pay them at least $450 (before tax) in a calendar month. You must make minimum superannuation contributions at least every three months.
Your small business can take advantage of the small business superannuation clearing house concession if it has:
- a turnover of up to $10 million; or
- fewer than 19 employees.
This concession allows you to make a single payment to the Clearing House, which is then distributed to your employees’ super funds.
A small business has to constantly keep in mind the tax consequences that flow from starting a business, such as investing in assets or providing benefits to employees. Therefore, by taking advantage of the small business tax concessions where available, you will have more funds left over to invest back into your business.
If you need help identifying small business tax concessions for which you may be eligible, contact LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.
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