The Government has announced that it will accept changes made by the Senate to the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016. The Bill will likely be passed by the House of Representatives in the next parliamentary session.
The Bill implements the Government’s plan to increase the Small Business Entity (“SBE”) turnover from $2m to $10m. Increasing the threshold provides a greater number of small businesses the opportunity to access numerous small business entity concessions. These changes apply from 1 July 2016.
Am I a Small Business Entity taxpayer?
The increased threshold does not alter the definition of a SBE, therefore it is important to first determine whether you or your business qualifies as a SBE. A SBE is defined as an individual or entity which is carrying on a business and the business either:
- in the prior income year, had an aggregated turnover of less than the threshold;
- the expected aggregated turnover for the current income year is likely to be less than the threshold unless the threshold was exceeded in the prior two income years; or
- the actual aggregated turnover calculated at the end of the year is less than the threshold.
The aggregated turnover for a business includes the total ordinary income derived in the income year and that of its connected entities and affiliates.
It is also important to highlight that the individual or entity must be carrying on a business to be classified as an SBE. There is no specific definition for 'carrying on a business' under the tax legislation.
It should be noted that the determination of whether an individual or entity is carrying on a business is a question of fact. If you are unsure as to whether your activities constitute the carrying on a business, you should seek advice from us.
A partner, including companies in their capacity as a partner, are not an SBE. The partnership itself however may otherwise qualify as a SBE.
What are the small business entity concessions available?
Providing you carry on a business and have an aggregated turnover of less than $10m the SBE concessions available include the following:
- Simplified depreciation rules allowing SBE taxpayers to choose an immediate write off for assets costing less than $20,000 (this threshold will reduce to $1,000 for assets ready for use after 1 July 2017).
- Simplified trading stock rules. Currently, those businesses who do not qualify as an SBE must conduct a stocktake at the end of the financial year to determine their closing stock balance for tax purposes. An SBE can estimate their closing stock balance without conducting an additional stocktake at the end of the financial year. This concession is only available if the movement in trading stock can be reasonably estimated as $5,000 or less.
- Prepayment rules allowing SBE taxpayers to claim an immediate deduction for prepayments that have an eligible services period of 12 months or less and the period ends before the end of the next income year. Non-SBE’s must apportion these expenses over the shorter of the eligible services period and 10 years.
- GST/BAS concessions allowing the SBE taxpayer to elect to account for GST on a cash basis and pay GST instalments as calculated by the ATO instead of submitting a BAS.
- PAYG instalment concession allowing taxpayers to choose to receive a quarterly pre-printed GDP-adjusted instalment to be paid rather than a calculated PAYG instalment.
- Reduced company tax rate of 27.5% available for SBE taxpayers in 2016/17 as opposed to the standard company tax rate of 30%.
- Immediate deduction of specified eligible business start-up costs rather than being restricted to write these costs off over a 5-year period.
- FBT concessions such as allowing an SBE employer to provide more than one identical work-related items within a single FBT year; for example, a work-related phone and laptop. These concessions will apply from 1 April 2017.
- Asset restructure rollover for a SBE taxpayer and connected entities allowing restructure of business active assets for genuine business purposes with deferred income tax consequences.
The following are excluded from the change in the turnover threshold changes:
- The Small Business CGT concessions remain unchanged meaning that only those small businesses with an aggregated turnover of less than $2m or a net market value of assets of less than $6m can access to these concessions.
- The unincorporated small business tax offset will remain at a maximum of $1,000.
The operation of the imputation system will from the 2016-2017 year be based on the company’s corporate tax rate for a particular income year worked out having regard to the entity’s aggregated turnover for the previous income year. This will lead to potential higher top up tax payments by dividend recipients and franking credit wastage.
These changes are good news for the small business sector, allowing a larger range of businesses to access the benefits afforded to SBE's. The threshold change allows small businesses the room to grow without the added pressure of losing the concessions available to a SBE. As these changes will apply for the 2017 financial year, these changes will immediately benefit taxpayers - definitely a win for all small businesses.