1 Introduction
Tax
provisions relating to the small businesses in Australia dated back to
Simplified Tax System (STS) rule enacted by Division 328 ITAA 1997 and applied
to the income years commencing from 2001. These small business concessions were
added to ITAA 1997 as a result of New Business Tax System (Capital Gains Tax)
Act of 1999. Though the motive was to simplify the tax regime and to reduce the
tax compliance cost it attracted much criticism despite the amendments made
later on to streamline the different provisions[1].
As a result in order to standardise the tax concessions which had many
definitions across the legislations, Small Business Entities (SBE) regime was
introduced in 2007 and was in effect from 1st July 2007 income year
and from 1st April 2007 for the Fringe Benefit Tax (FBT) purposes[2].
Since then there has been number of attempts to grant concessions to the SBEs.
The most notable and the recent change was to reduce the SMEs income tax to 25%
and to broaden the SBE aggregate turnover threshold to $50 million
progressively until the income year 2026–27[3].
2 Definition of small business in
taxation law
Small
Businesses have access to number of concessionary payments and reporting under
the Australian tax legislatives. Irrespective of the type of the business, that
is whether it is sole proprietorship, partnership, company or trust, the SBE
concession could be claimed by the entity if it falls under the SBE definition.
The
operative provision of Income Tax Assessment Act 1997 (ITAA 1997) s 328-110(1) stipulates
that a business to be a SBE for an income year it should satisfy two conditions[4],
in brief;
- - carried out a business in the income year and
- - the aggregated turnover is
less than $10 million.
As
per ITAA 1997 S328-120(2) aggregate turnover in this connection is referred to
the income derived in the ordinary course of carrying on the business in the
income year. Thus, the turnover does not include any non-assessable and
non-exempt income for the income year, such as GST payable on the taxable
income, increase adjustment relating to a supply or acquisition or adjustment
occurred as a result of recoupment.
Further S328-120(4)[5] addresses the possibility of splitting the income between associates to
in order to gain the tax concessions. According to the section, if any
transaction between an associate, not occurred as an arm’s length, the entity’s
annual turnover should include such transactions measured at market value.
The aggregate turnover of the entity should be likely to less than $ 10
million for the current year and if the entity carried out business in the
previous income year the aggregate turnover for the previous year should be
less than $ 10 million to fall within the meaning of SBE inter alia. However,
according to S328-110(3)[6] if the aggregated turnover
for the immediately two preceding years exceeds $10 million, the entity is not
categorised as a SBE.
3 Tax treatments for income from
businesses for small businesses
SBE
concessions have been amended through Treasury Laws Amendment Bill in 2016
which will apply from the income year 2017 onwards. These amendments have
further expanded and allowed more business to enjoy the tax relives. The
reduced compliance cost, simplification of tax rules and record keeping
requirements are benefits that could accrue to a SBE by introducing these
concessions. Below are the concessions applicable under the income from
business;
-
Reduced corporate tax rate
-
Depreciation - immediate asset write
off
-
Stranding stock rule
-
Prepaid expenses – immediate deduction
Reduced corporate tax rate
For
the income years 2016/17 and 2017/18 the corporate tax rate for SBE has been
reduced to 27.5% and the turnover threshold has been increased to 10Mn and 25Mn
respectively. Annexure 1 illustrates the SBE progressively reduced corporate
tax from 28.5% to 25% and increase in aggregate turnover threshold from 2
million to $ 50 million from the income year 2016 to 2027.
Depreciation
As the s
328-170 of ITAA 1997 stipulates, a SBE can opt to depreciate most of the
depreciating assets under an accumulated pool named as single depreciating assets using 30%[7] rate under diminishing
value method rather than under division 40 – Capital allowances[8].
This concession has allowed the SBEs to accelerate the depreciation charge by
introducing a higher rate or by immediate deduction. Due to this higher rate of
deduction the current year tax liability of SBE becomes less than that of other
non-SBEs.
Though for
SBE, who carries out primary production[9]
business, can elect to apply Subdivision 40-F or 40-G or even SBE depreciation
under 328-170, the businesses carrying on horticultural plants with
depreciating asset lease and assets allocated under subdivision 40-E – low
value and software development pool cannot
apply this section even if the business can be categorised as a SBE. Further if a SBE applies S328-170 for the
depreciation of the depreciating assets and later if the SBE ceased to be a SBE
or discontinue the use of this section, SBE can still continue to use the
general small business pool for succeeding income years.
The Division
328 - Small business entities subsection 180(1) states that if the cost of a depreciating asset at the end of the
income year is less than $1,000, such asset can be accumulated to the general
small business pool and depreciated at 30%. However, if the asset is acquired between 12 May 2015 and 30 June 2018 the pool threshold is set at
$20,000[10].
Stranding stock rule
SBE
can elect not take a stock count if the difference between opening and
reasonable estimate of the value of stock at the end of the income year is
likely to be less than $5,000[11].
Prepaid expenses – immediate
deduction
In
order to restrain the tax payers claiming the outgoings which has a future
benefits (prepayments) sections 82KZL to 82KZMG of ITAA 1936 regulate the
timing of the these advanced payments. However, SBEs were granted with an
exception where if a payment for a service is up to 12 months, such payments
can be allowed for an immediate deduction irrespective of whether it extends to
the next subsequent income year[12].
4. Tax treatments for income from
properties for small businesses
The
income/gains from properties could take two forms, i.e., recurring income as a
flow [13]and
non-recurring income as capital gains. For SBEs the most notable concession
from property is the capital gains tax (CGT) small business relief available
under Div 152 of ITAA 1997, viz.;
-
15 year exemption
-
50% reduction
-
Concession on retirement
-
Relief on roll-over
For
the purpose of this division, a SBE is defined under subdivision 152‑5 as
follows;
-
The entity should be a SBE with an
aggregated turnover of less than $2Mn[14].
-
The entity shall be a SBE or a partner
in a partnership[15]
-
Net value of the assets of the entity
and the related entities should not exceed $6Mn
-
The CGT asset must be an active asset
either tangible or intangible which is either used or held ready for the use in
the course of the business (in relation to tangible assets) or inherently
connected with the business (in relation to intangible assets)
-
If the CGT asset is the interest of a
trust, there should be CGT concession stakeholders prior to occurring the CGT
event.
15 years exemption
There
will not be any assessable CGT if an asset, that is active, is continuously
owned by a SBE for 15 years and the taxpayer is 55 years of age or over and is
retiring or permanently incapacitated.
50% reduction
The
capital gains on an active asset has been reduced by 50%. This allowance is
granted in addition to the CGT 50% discount rate granted if the asset is held
for more than 12 months and totally allowing a 75% discount on the capital gain
for SBEs.
Concession on retirement
At
the retirement of the tax payer if the he utilises the capital gains arising
from an asset connected to SBE, the CGT exemption can be claimed up to a
lifetime limit of $0.5Mn. If the taxpayer is under 55 years of age, the exempt
proceeds should be invested in a complying superfund or retirement saving
account. On the other hand if the taxpayer is older than 55 years, the proceeds
should not be rollover to a superfund to claim the exemption for the CGT.
Relief on roll-over
The
capital gains could be deferred for two years for the whole or part of the gain
if a SBE sells an active asset. This could be deferred longer if the capital
asset is replaced or incurred capital expenditure in improving the existing
asset.
5. Tax treatments for offsets and
deductions for small businesses
ITAA
1997, subdivision 328-F deals with the small business income tax offset. This
section is applicable to;
-
Individual who is a SBEs
-
Share of net SBE unincorporated income
is included in such individual’s assessable income.
-
SBE income is included in the
assessable income of an individual as a result of being partner of a
partnership or a beneficiary of a trust which is a SBE.
Based
on this provision it could be understood that the small business tax offset
could be claimed not only by an individual who carries out a business which
falls under the definition of a small business but also by an individual who is
a beneficiary of a trust or partner of a partnership which is eligible for the
SBE.
The
eligibility under this regime is a non-refundable tax offset up to a maximum of
$1,000 applicable from the income year 2015/16, calculated 5% on the total net
SBE income tax payable, excluding the capital gains. From the income year
2016/17 onwards the rate has been increased to 8% to 16% by the end of 2026/27
income years. In other words the offset is capped up to a maximum of $1,000 per
income year. In deciding whether an entity is a SBE, $5Mn threshold test is
applied. For the income year 2015/16, the income threshold was $2Mn.
For
a small trader there are some eligible incomes and expenditures. Below are some
income and expenditure a SBE cannot claim for this purpose;
Income
-
Net capital gains
-
Personal service income
-
Salary and wages
-
Government allowances
-
Interest and dividend
-
Farm managed deposit interest
Expense
-
Tax related expenses
-
Gifts and donations
-
Personal contribution to
superannuation
-
Business loss for the current year
-
Preceding years tax losses
For
a partnership, if the share of net SBE income is less than the deductions
allowed, the partnership share is treated as zero. Similarly for a trust also,
if the deductions exceeds the share of income from the trust, the net income is
treated as nil. In this regard the following are not deductible for both
partnership and trust;
-
Tax related expenses
-
Gifts and donations
-
Personal contribution to
superannuation
The
tax offset is computed as a proportion of tax payable related to SBE net small
business income.
6 Other tax concessions for small
businesses
Apart from the aforementioned
concessions for SBEs the tax regime has granted number of other relives including
administrative, simplification and lower tax regimes to encourage the
businesses. With regard to tax administration, SBEs are granted with 2 years
standard period for amending the assessment[16]. The below sections
discuss the different tax concessions available for a SBE.
Goods and Services Tax (GST) and
excise concession
An entity which falls under the
definition of SBE can opt to account the GST on cash basis[17].
For GST SBE concession purpose, the turnover threshold is $10mn from 1st
July 2016 and $2Mn up to 30 June 2016.
With regard to the settlement of
excise duty, SBE can opt to apply to defer the excise duty to monthly reporting
from the weekly reporting cycle.
Small business car parking –
Fringe Benefit Tax (FBT)
According to S58GA
of Fringe Benefits Tax Assessment Act 1986, car parking provided in relation to
an employment to an employee in a particular FBT year is exempted if;
-
Car is parked in a place other than in
a commercial parking station
-
Employer is other than a public
company or a government body
-
Either,
the total ordinary income of the employer is less than $10Mn or a SBE.
Cash basis accounting
After
1st July 2007, the STS regime has been superseded by the SBE scheme and the
only test require an entity to be categorised as a SBE is the turnover test as
discussed in section two of this report under definition of a SBE. In order to
improve the cash flow off the SBEs, further concession has been granted
allowing the entities to report and calculate tax payable on cash basis. This
is an additional relief apart from reporting GST on cash basis discussed under
section 6 part - Goods and Services Tax (GST) and excise concession.
Pay-As-You-Go instalment
concession
A
SBE has the option to make a payment towards income tax year end liability
through the PAYG instalment, the amount of which is determined by the
Australian Taxation Office. This amount is computed using the previous
information provided by the SBE.
As per S45‑130[18] of Tax Administration
Act, based on the gross domestic product adjusted national tax method SBEs are
eligible to compute PAYG instalment liability. This method will not only saves
time but also a simplified relief available for a SBE.
Immediate write off of start-up
expenses
SBEs
have granted a concession under 40-880(2A) of ITAA 1997, where certain capital
nature expenditure incurred in relation to proposed structure and operation of
the business can be deducted immediately in the year it incurred rather than
apportioning it over 5 years, which is the provision relating to other business
entities. These expenses includes, agency fees
paid to the government of Australia, other taxes or charges incurred in setting
up the business or its operating structure.
Annexure 1
|
Year
|
Aggregated turnover threshold
|
(SBE) Corporate entities under the
aggregated turnover threshold
|
All other corporate entities
|
|
2015–16
|
$2m
|
28.5%
|
30.0%
|
|
2016–17
|
$10m
|
27.5%
|
30.0%
|
|
2017–18
|
$25m
|
27.5%
|
30.0%
|
|
2018–19
|
$50m
|
27.5%
|
30.0%
|
|
2019–20 to 2023–24
|
$50m
|
27.5%
|
30.0%
|
|
2024–25
|
$50m
|
27.0%
|
30.0%
|
|
2025–26
|
$50m
|
26.0%
|
30.0%
|
|
2026–27
|
$50m
|
25.0%
|
30.0%
|
Source
- ATO, 2017[19]
[1] Marsden, S., Sadiq, K., &
Wilkins, T. (2013). Small business entity tax concessions: Through the eyes of
the practitioner. Revenue Law Journal, 22(1), 1-21. Retrieved from
http://epublications.bond.edu.au/rlj/vol22/iss1/4
[2]
ATO. (2017, July 28). Small business entity income tax
concessions. Retrieved from Australian Taxatin Office:
https://www.ato.gov.au/business/small-business-entity-concessions/concessions/income-tax-concessions/
Marsden, S., Sadiq, K., & Wilkins, T. (2013). Small
business entity tax concessions: Through the eyes of the practitioner. Revenue
Law Journal, 22(1), 1-21. Retrieved from
http://epublications.bond.edu.au/rlj/vol22/iss1/4
Pizzacalla, M. (2009). Australia’s SME tax system: is it
working? Small Enterprise Association of Australia and New Zealand
Conference. Wellington, New Zealand: Small Enterprise Association of
Australia and New Zealand.
[3] ATO. (2017, November 02). Reducing the corporate tax rate.
Retrieved from Australian Taxation Office: https://www.ato.gov.au/General/New-legislation/In-detail/Direct-taxes/Income-tax-for-businesses/Reducing-the-corporate-tax-rate/
[4] PFGG
v Commissioner of Taxation [2015] AATA 972; 102 ATR 677
[5] Income Tax
Assessment Act 1997 (Cht)
[6] Income Tax Assessment Act 1997 (Cht)
[7] 30% of depreciation rate for the subsequent
years after the first year of acquisition and for and 15% for the assets
acquired during the income year irrespective of the date of acquisition during
the year - Income Tax Assessment Act 1997 (Cht), S329-190(2)
[8] Income Tax Assessment Act 1997 (Cht)
[9] The
recent change on the legislation has allowed more relives for the primary
producers by way of accelerated depreciation. Under these amendments, water and
fencing facilities of primary producers are allowed an immediate deduction on
the capital expenditure and a deduction over three years period is allowed for
fodder storage assets capital costs.
[10] Income Tax (Transitional Provisions) Act 1997 S328-180(4)
[11] Income Tax Assessment Act 1997 (Cht), S329-285
[12] Income Tax
Assessment Act 1936 (Cht), S82KZM
[13] Eisner v Macomber 252 US 189 (1920)
[14] Even though the turnover threshold has been
increased progressively for the SBEs under the
ITAA 1997 s 328-110(1) and for the
income year 2016/17 it is $10Mn, for the purpose of CGT, the turnover threshold
will remain at $2Mn and the progressive increase of threshold will not be
applied.
[15] Partner cannot be a SBE and the partnership
should satisfy the SBE test for the partner to claim the SBE CGT concession.
[16] Income Tax Assessment Act 1936 (Cht), S170
[17] A New Tax System
(Goods and Services Tax) Act 1999 (Cth), 29-40
[18] Taxation Administration Act 1953 (Cth)
[19] ATO. (2017,
July 28). Small business entity income tax concessions. Retrieved from
Australian Taxatin Office:
https://www.ato.gov.au/business/small-business-entity-concessions/concessions/income-tax-concessions/
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