SBEs can include companies, partnerships, trusts or sole traders. To qualify as an SBE the following two criteria must be met:
1. CARRYING ON A BUSINESS
To be an SBE you must in the first place be carrying on a business. The long-standing ATO tax ruling in this area is Taxation Ruling Tr 97/11 which contains the following series of factors that may indicate that a business is indeed being carried on:
- There is a significant commercial purpose or character
- There is more than a mere intention to engage in business
- There is a repetition and regularity to your activities – and some genuine time spent on the activity
- The business is carried on in a similar way to others within the same industry
- There is organisation to your activity
- There is size and scale to the activity
- It is not a hobby or a form of recreation
Leaving aside the tax concessions on offer, carrying on a business (as distinct from a hobby) brings with it a range of tax obligations. If you are in any doubt as to whether your are indeed carrying on a business you should consult your Accountant.
2. TURNOVER <$2 MILLION
If you are carrying on a business, you will be an SBE if your aggregated annual business turnover (i.e. gross profit) is less than $2 million. This includes the turnover of:
- Connected entities – an entity is connected with another entity if: either entity controls the other, OR Both entities are controlled by the same third entity.
- Affiliates – an affiliate is any individual or company that, in relation to business affairs, acts or could reasonably be expected to act: According to your directions or wishes, OR In concert with you.
The $2 million turnover threshold is absolute. If it is exceeded by even $1, your business will be ineligible for many SBE concessions on offer (some detailed later). If your business’s turnover is around $2 million, it’s worth keeping a close eye on it at financial year-end. While we do not suggest that, you avoid growing your business just to stay under the threshold, if your turnover is nearing the threshold at financial year-end, it certainly pays to stay under that threshold from a tax perspective – perhaps by deferring year-end invoicing where practical to the following financial year (post 30 June).
We now examine some of the SBE concessions available –
IMMEDIATE DEDUCTIONS FOR PREPAID EXPENSES
As an SBE you can claim an immediate deduction for certain prepaid business expenses where either of the following 2 conditions is met:
1. The payment is for a period that is 12 months or less and ends on or before the last day of the income year in which the expense is incurred, or
2. The prepaid expense is “excluded expenditure” which is defined as expenditure that is:
- Less than $1,000 (GST-exclusive) or
- Prepayments that are required to be made under a law or by court order under the Commonwealth, State, or Territory (e.g. car registration, workers compensation, etc) or
- Made under a contract of service (e.g. salary and wages).
In May 2016, Bruce’s business prepays $2,000 for an advertisement to be run in the local newspaper every fortnight for six months from May until November.
If Bruce’s business was not an SBE (i.e. had a turnover of $2 million or more) and the prepayment was for $1,000 or more, the deductions must be apportioned over the periods to which they relate. Therefore only two months’ worth of deductions (for May and June) could be claimed in 2015/2016. The remainder must be claimed in 2016/2017 being the period to which they relate.
If Bruce’s business is an SBE, then because the period for which the payment relates is for 12 months or less and ends before the conclusion of the following income year (2016/2017), Bruce can claim the entire $2,000 prepayment as a tax deduction in the 2015/2016 tax return. This is irrespective of the fact that the amount exceeds $1,000. This outcome reduces Bruce’s taxable income for the year, resulting in less tax and a consequent cash-flow benefit.
Assume instead that the above $2,000 amount was for vehicle registration for a vehicle used exclusively in the business. Although the amount is for more than $1,000 and covers more than one income year, there is no requirement to apportion the payment. It can all be claimed in 2015/2016 as it is required to be paid under State Government law.
The prepaid expenditure concession provides SBEs with cash-flow relief by enabling them to bring forward deductions that would otherwise be apportioned over two income years. Examples of business expenditure items that you may wish to prepay include rent, insurance, repairs to business assets, subscriptions, business trips, seminars and conference bookings, leases, deductible car registration fees, and telephone and internet services.
TRADING STOCK RELIEF
Conducting a stock-take usually involves physically counting your stock and valuing each item. This can be a time-consuming process. Rather than conduct an end-of-year stock-take in order to account for changes in the value of your trading stock, as an SBE you can elect not to conduct a stock-take where there is a difference of $5,000 or less between:
- The value of your stock on hand at the start of the income year and
- A reasonable estimate of the value of your stock on hand at the end of the income year.
An increase in your trading stock’s value over the year is assessable income, while a decrease is an allowable deduction. It follows that where there has been a decrease, you may wish to ignore this SBE option of not conducting a year-end stocktake (to not conduct a stocktake in such circumstances would be to deny your business a year-end deduction).
INSTANT ASSET WRITE-OFF
2016/2017 is the final year for SBEs to take advantage of the $20,000 instant asset write-off and provide your business with cash-flow relief. Until 30 June 2017, SBEs can claim an immediate write-off for most depreciating assets used in their business if the asset cost less than $20,000.
Being in its final year of operation the timing requirements around the instant asset write-off are important.
To claim a deduction in 2016/2017, the asset must be first acquired from 1 July 2016 and first used or installed ready for use in your business on or before 30 June 2017.
Assets acquired before 1 July 2016, but first used or installed ready for use between 1 July 2016 and 30 June 2017 are also claimable in full in 2016/2017.
If you miss the deadline (i.e. if the asset is not being used in your business or installed ready for use on or before 30 June 2017) then the write-off threshold reverts to $1,000. Missing the deadline will result in a worse cash-flow outcome for your business than if the deadline is met (see later example).
Assets costing $20,000 or over are depreciable at a rate of 15% in the first year, and then 30% in subsequent years.
CASE STUDY: CASH-FLOW BENEFIT
An eligible SBE company purchases an eligible asset for $19,999 on 2 July 2017. As the asset is not purchased and installed ready for use on or before 30 June 2017 the instant write-off threshold is only $1,000. As this asset exceeds this threshold the standard pooling rules apply. The asset will be written off at 15% in the first year of 2017/2018 ($3,000) and 30% in subsequent years. The real benefit (i.e. the effect of the tax deduction in dollar terms) the company would receive from these depreciation claims is $855 for the first year (assuming a 28.5% small company tax rate) and $1,453 in the second year (assuming a small business company tax rate of 28.5%). The company would continue to depreciate its general pool at 30% until the pool was under $1,000, at which point the entire pool could be written-off (after approximately 9 years).
By contract, if the purchase of the asset was brought forward a few days and the asset was used or installed ready for use on or before 30 June 2017 under the $20,000 threshold, the company would be able to immediately deduct the entire $19,999 in the first income year (2016/2017). The real benefit (i.e. the effect of the tax deduction in dollar terms) the company would receive from this is $5,699 in the first year ($4,844 more than under the old rules – i.e. the benefit is brought forward rather than spread out and therefore assists the company’s cash-flow).
The company is then free to apply this brought-forward cash immediately (e.g. pay off debt or re-invest in the business etc). In the second income year, there is no further depreciation of this asset as it has been written-off completely. This means that the company is paying more tax in the second year relative to the earlier scenario (but no more and no less tax overall).
This Case Study illustrates the importance of meeting the 30 June 2017 deadline this financial year. After this date, the write-off threshold reverts back to $1,000.
Having determined that a business is eligible, the asset itself must be eligible for the write-off. Basically, all depreciable assets (including second-hand assets) used in a business are eligible for the $20,000 write-off – including motor vehicles, furniture, computer equipment, machinery etc. The following assets are however, specifically excluded from the write-off as they have their own unique depreciation treatment:
- Horticultural plants
- Buildings (these are dealt with under the Capital Works provisions)
- Primary production assets for which an entity has chosen to use the Uniform Capital Allowance (UCA) depreciation rules rather than the small business depreciation rules, and
- Assets leased out to another party on a depreciating asset lease.
SBEs can access this instant asset write-off concession simply by claiming the write-off on the business’s return (or your personal return if you are a sole trader).
SIMPLIFIED PAYG INSTALMENTS
SBEs that report and pay PAYG instalments quarterly can elect to pay instalment amounts worked out for them by the ATO (known as ‘Option 1’). This ATO fixed dollar amount is then printed on your quarterly Activity Statement at label T7 or your instalment notice. Adopting this option can save you time in working out the instalment amount you need to pay. It also removes the risk of under or over estimating PAYG instalments and the resulting penalties that may be applied by the ATO.
You can choose this option in your first quarter of the income year (typically, this is the Activity Statement or instalment notice due in October). Once chosen, this option applies for the whole of the income year.
Where you elect to pay using Option 1, you are still permitted to vary the ATO instalment amount if your current year business or investment income is trending less than last year. This may be the case where for example:
1. You are downsizing
2. You are experiencing reduced sales compared to last year
3. Your expenses have increased from last year.
In making a downwards variation, be aware that penalties may apply if your variation results in you, or your business, paying an amount that is less than 85% of the actual tax payable on your business and investment income for the financial year. Therefore, before you make a variation, consult your Accountant.
SIMPLIFIED GST INSTALMENTS
In a similar vein, SBEs may be eligible to pay their GST liability on an amount worked out for them by the ATO – therefore, decreasing administration time for your business. The ATO will notify you of your eligibility on your business’ first quarterly Activity Statement for the year (generally the September quarterly Statement). If you choose to use this method you must inform the ATO by selecting this option on that Activity Statement. Generally, your business will be eligible where your business:
- Is a SBE (see earlier criteria, and note the proposed increase in the turnover threshold to $10 million)
- Is not required to lodge your Activity Statements on a monthly basis and have not elected to do so
- Has a current lodgement record of at least 4 months
- Is not in a net refund position.
Note that even if you are eligible, your election can be disallowed if your business has a history of failing to comply with your tax obligations. The benefit of this concession is that it saves you time in working out the instalment amount you need to pay. It also removes the risk of under or over estimating your GST instalments and the resulting penalties that may be applied by the ATO.