Small business is in my blood.
I have always been fascinated with small business; several members of my family run their own businesses. For many years I ran my own business, so I have an affinity for small business owners, and I always strive to meet them on their level.
There are numerous tax concessions available to small businesses, small business tax concessions may apply to relevant entities with turnover of less than $2 million and up to $10 million. Turnover thresholds can vary depending on each tax concession.
You will need to meet the following requirements:
- Operate a business for all or part of the income year AND have a turnover of less than $10 million.
- $10 million turnover threshold does not apply to all tax concessions, some specific concessions have a different turnover threshold.
There are a range of tax concessions available for Small Business Entities, I have highlighted a range of concessions below:
Simpler depreciation rules (instant asset write off)
An eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year it is first used or installed for use. The eligibility criteria and thresholds for this concession have changed over time, so you will need to check with your tax advisor which thresholds apply for the asset you have purchased. It all depends on the date you have purchased your business asset. The government introduced Temporary Tax Depreciation incentives for assets that Small Business Entities first used or have installed for use from 6 October 2020 to 30 June 2023.
Small business example
Ben operates a small business as a plumber and meets the eligibility criteria for a Small Business Entities. On 1 March 2020, he purchased a motor vehicle for his business for $45,000. The asset was purchased prior to 12 March 2020, he will need to depreciate the asset over several years using the ATO depreciation rates. If Ben had purchased the asset after 12 March 2020, he would be able to take advantage of the instant asset write off and claim the full cost of the motor vehicle as a deduction during that tax year. The instant asset writes off threshold for each asset purchased went up to $150,000 on 12 March 2020.
Deductions for professional expenses for start ups
From 1 July 2015, Small Business Entities are entitled to certain deductions when starting up a small business, including professional, legal, and accounting advice. From 1 July 2020, Small Business Entities with a turnover less than $50 million are also entitled to these deductions.
Small business example
Sadie has started her own cleaning business and meets the eligibility criteria for a Small Business Entities. Prior to starting the business, she obtained professional advice from her accountant regarding setting up the business. She can claim the full amount of this advice as a tax deduction in the year in which it is incurred. Prior to 1 July 2015, she would have claimed the amount paid for the advice over five tax years.
Simplified trading stock rules
The simplified trading stock rules concession allows you to make an estimate for your trading stock at the end of the financial year. Rather than conducting a stock take as long as the change in the trading stock is less than $5,000 for the year. For example, the difference between opening stock and closing stock over the full tax year is less than $5,000. From 1 July 2021, Small Business Entities with a turnover less than $50 million is also entitled to these deductions.
Small business example
Fred is an electrician and meets the eligibility criteria for Small Business Entities. Fred has various items that make up his trading stock and at the end of the previous tax year he valued his stock at $12,500. Fred’s business hasn’t changed much during the current tax year, and he estimates that the amount and type of stock he holds at the end of the tax year is similar. Fred understands that the cost of the items he has purchased has increased by around 10% during the year, so he estimates the value of the stock at the end of the year as $13,750 ($12,500 + 10%). The difference between Fred’s opening and closing stock is less than $5,000. This means Fred does not need to do a stock take and can accept the estimate he has made for his closing stock and use this in preparing his income tax return.
Small business income tax offset
Small business restructure rollover
From the 1st of July 2016, Small Business Entities can change the legal structure of their business without incurring any income tax liability when transferring active assets from one entity to another. These active assets include trading stock and depreciating assets etc. You can access this concession if your turnover is less than $10 million.
Small business example
Sally runs a small business selling used furniture as a sole trader. She wants to run the business through a unit trust. She sets up the Sally Be Unit Trust with herself as the sole unit holder and transfers the business including all the active assets into the trust. While there is no change in the ultimate economic ownership of the assets, there would be no income tax liability for the transfer.
Summing up
You can claim a deduction for most costs you incur in running your business, for example staff wages, marketing, and business finance costs. Remember you can’t claim private expenses and make sure you keep records to support your claims.
There are many tax concessions for small business that you can take advantage of. It’s important you understand each thoroughly and this is where a skilled accountant comes in. Small business taxation can be complex due to ongoing changes in tax legislation.
Having an experienced accountant who is up-to-date and abreast of changes in legislation, will help you make sense of the tax landscape and assist you to improve the health and performance of your business.
Written by Dona Pinkowski
Senior Accountant
Oracle Accounting Erina
