Businesses with an aggregated annual turnover of less than $10million have access to several Small Business Income Tax Concessions. Many of the concessions available have been around for some time but we thought it was a good idea to summarise some of the key ones for you.
Lower Company Tax Rate:
Whilst this is no longer a ‘small business’ only concession, from the 2019 financial year onwards it is still relevant to companies that operate a business and have aggregated annual turnover of less than $50 million. To be eligible for the lower company tax rate of 27.5%, a company must be a base rate entity.
A company is a base rate entity if both of the following apply:
- they have a turnover less than the turnover threshold – which is $50 million for the 2018–19 income year
- 80% or less of their assessable income is base rate entity passive income (such as interest, dividends, rent, royalties and net capital gain).
Small Business Income Tax Offset:
The small business income tax offset applies to taxpayers that are either:
- a small business sole trader; or
- have a share of net small business income from a partnership or trust
and the aggregated turnover is less than $5 million.
The tax offset works to reduce the tax these taxpayers pay by up to $1,000 each year. The offset is claimed in the taxpayers annual income tax return and the ATO will calculate the offset based on the small business income amounts reported in your tax return.
Simplified depreciation rules – instant asset write-off:
Small Business entities, can claim a deduction for each asset first used or installed ready for use, costing less than the following thresholds:
- $30,000, from 7.30pm (AEDT) on 2 April 2019 until 30 June 2020
- $25,000, from 29 January 2019 to 7.30pm (AEDT) on 2 April 2019
- $20,000, before 29 January 2019.
At this stage, the threshold will revert to $1,000 from 1 July 2020.
You may purchase and claim a deduction for multiple assets provided each asset costs less than the relevant threshold.
From 2 April 2019, the instant asset write-off has also been expanded to include businesses with a turnover from $10 million to less than $50 million.
Deductions for Professional expenses for startup Small Businesses
In place from 1 July 2015, startup companies, trusts or partnerships can immediately deduct a range of professional fees incurred with starting the new business. The range of deductible start-up costs includes professional, legal and accounting advice and government fees and charges.
For taxpayers that are not small business entities, these expenses may be claimed over a five year period.
Simplified trading stock rules:
This concession, available to small businesses with an aggregated turnover of less than $10 million, allows you to estimate the value of your trading stock at the end of the financial year and determine whether you need to conduct a formal stock take or account for the changes in your trading stock value based on the estimated change in value of that trading stock.
This simplified approach is available where there is a difference of $5,000 or less between:
- the value of your stock at the start of the income year
- a reasonable estimate of the value of your stock at the end of the year.
In order to apply the simplified trading stock rules your estimate must be reasonable. The ATO considers estimates to be reasonable where:
- you maintain a constant level of stock each year and have a reasonable idea of the value of your stock on hand
- your stock levels fluctuate but you can make an estimate, based on your records, of the stock you have purchased
If you choose not to use an estimate, you will need to conduct a stocktake and account for the changes in the value of your stock in line with the general trading stock rules.
Immediate Deductions for prepaid expenses:
Small business entities with an aggregated annual turnover of less than $10 million may be able to claim an immediate deduction for prepaid expenses where the payment covers a period of 12 months or less that ends in the next income year.
If the prepayment does not meet the 12-month rule, the deduction cannot be claimed immediately but will need to be apportioned over the relevant period to which the expense relates.
The use of these income tax concessions can result in significant taxation savings. If applied incorrectly they can trigger costly mistakes. Given some of the complexities surrounding eligibility and application of the concessions, speaking with your advisor and getting the right guidance will ensure you maximise use of the concessions relevant to you.
The above summary provides a list of some of the small business income tax concessions available based on the relevant eligibility requirements. In addition to these income tax concessions there are a number of GST, FBT and Capital Gains Tax concessions available to small businesses that may be beneficial to you and your business.
For more information on the small business concessions, please contact your Davidsons team member or call our office on 03 5221 6399 to speak with a tax and business services specialist.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.