It is a well-known fact that small to medium businesses drive the majority of the Australian economy. The ATO has made certain income tax concessions available for small entities in particular, since at least 2002 with the introduction of the Simplified Tax System which then transitioned into the now known Small Business Concessions.
Small entities are able to access a range of payment and reporting concessions provided in general their (and that of their connected or affiliated entities) aggregate annual turnover is less than $2 million.
SOME OF THE AVAILABLE INCOME TAX CONCESSIONS INCLUDE:
- Immediate deduction for prepaid expenses provided certain criteria is met
- Instant asset write-off for assets costing less than $20,000 and were purchased between 12 May 2015 and 30 June 2017
- Pooling of assets costing more than $20,000 and applying accelerated depreciation rates
- Accelerated depreciation for primary producers and instant asset write-off for fencing and water facility costs
- Company tax cut from 30% to 28.5%, with sole traders being potentially eligible for a tax offset of up to $1,000
Note that there are also income tax concessions that may be available in respect of GST (Goods and Services Tax), PAYG instalments and FBT (Fringe Benefits Tax).
The main eligibility criteria of having aggregate annual turnover of less than the threshold may be quite straightforward for some businesses but for others where related entities may exist, for commercial or other reasons, it is important to take them into consideration. The notion of connected entities is concerned with how control is exercised and affiliated entities are generally those who are acting under your directions or act in concert with you. These are particularly crucial when applying the concession for capital gains tax purposes.
Small Entity Capital Gains Tax (CGT) Concession
Although the income tax concessions will no doubt provide savings to taxpayers, the small business entity concessions that may be applied following a capital gain event (sale of business, for example) can provide significant savings and potentially reduce any capital gains tax payable on the transaction to nil. In a recent experience, a transaction involving an $11 million sale of an active asset resulted in nil capital gains tax liability by using one or a combination of the available concessions below:
- 15-year exemption
- 50% active asset reduction
- Roll-over exemption
- Retirement exemption
It is also important to note that in the May 2016/17 budget, the government announced that the turnover threshold will be increased to $10 million effective 1 July 2016. However, the $2 million turnover test will be retained for access to the small business CGT concession.
Small Entity Restructure Rollover
Lastly, one of the most recent income tax concessions being introduced is the small entity restructure rollover which allows small businesses to transfer active assets from one entity to one or more other entities on or after 1 July 2016, without incurring an income tax liability. Only certain business assets are eligible and the rollover is only available if it is part of a genuine restructure and there is no change in the ultimate economic ownership of the assets, which may be difficult if a discretionary trust is involved.
There are also various tax and non-tax implications in transferring the eligible asset under this rollover concession, which should be considered prior to executing the restructure.
The small business CGT concession and restructuring rollover are particularly complex area of the tax legislation and the ability to satisfy the question of “am I small enough?” is a crucial one. It is recommended that you contact RSM or your tax advisors prior to entering into any major transactions.
Arlene Kristianto, Partner – RSM Australia