Tax concessions for small business entities

If you are a sole trader, there are a number of small business tax concessions that you may be able to utilise.

A small business entity is broadly a business with an aggregated turnover of less than $10 million.

Income tax concessions

Start-up costs

You may be entitled to deduct certain costs when starting up a business, including professional, legal and accounting advice and government fees and charges.

Simplified trading stock rules

This concession allows you to choose not to account for changes in the value of the trading stock at the end of the financial year for tax purposes. You will need to record how the value of the stock was estimated, but there is no need to tell the ATO you have chosen to use an estimate.

You can choose not to conduct a stocktake (and account for changes in the value of trading stock) if there is a difference of $5,000 or less between:

  • The value of your opening stock at the start of the income year; and
  • A reasonable estimate of the value of your closing stock at the end of the year.

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.

Immediate deductions for prepaid expenses

You may be able to claim an immediate deduction for prepaid expenses incurred in an income year where the payment covers a period of no more than 12 months that ends by the end of the following income year.

Two-year amendment period for individuals

The Commissioner generally has a two-year period, starting after the day on which the ATO issued a notice of assessment, to amend the assessment. However, the two-year amendment period does not apply if you are in a ‘high risk’ category, have complicated tax affairs or are subject to an anti-avoidance provision.

Small business restructure roll-over

You can change the legal structure of your business without incurring an income tax liability. This roll-over applies to active assets that are CGT assets, trading stock, revenue assets and depreciating assets used, or held ready for use, in the course of carrying on a business.

CGT concessions

There are four CGT concessions available to eligible small businesses:

  • The small business 15-year exemption;
  • The small business 50% reduction;
  • The small business retirement exemption; and
  • The small business roll-over.

The small business CGT concessions are available where one of the following conditions is satisfied:

  • The business’ aggregated turnover is less than $2 million (not $10 million as for other most other small business concessions);
  • The sum of the net value of your CGT assets and those of your affiliates and any entities connected with you does not exceed $6 million; or
  • You are a partner in a partnership that is a small business entity (i.e. aggregated turnover is less than $2 million), and the asset is an interest in an asset of the partnership; or
  • The conditions for certain passively held assets are satisfied.

Importantly, the asset in question (i.e. the capital gain from the CGT event that happened to the asset that will benefit from the CGT concessions) must be an active asset. This means that the asset must be used in the course of carrying on a business (whether alone or in partnership) or must be an intangible asset (for example, goodwill) inherently connected with a business.

There are certain exceptions. For example, an asset that is used mainly to derive rent, interest or royalties is generally not an active asset.

The active asset test is satisfied if the asset was an active asset:

  • For a total of at least 7½ years during the test period, if you owned it for more than 15 years; or
  • For at least half of the test period, if you owned it for up to 15 years.

If the asset is a share in a company or an interest in a trust, additional conditions must be met.

Other concessions

These include:

  • GST concessions – e.g. accounting for GST on a cash basis, and paying GST by instalments and reporting GST annually;
  • PAYG instalment concession – you can pay PAYG instalments using a GDP-adjusted notional amount calculated by the ATO.

Valuing assets

It is important to value assets (or liabilities) correctly for tax purposes. Valuations may be required for a variety of purposes, such as:

  • Market value substitution rules used for domestic CGT and income tax purposes;
  • Asset threshold tests such as those in relation to the small business CGT concessions;
  • Indirect tax rules such as the GST margin scheme rules; and
  • Transfer pricing rules affecting non-arm’s length international dealings.

But valuing an asset isn’t always easy. To help taxpayers, the ATO has updated its guidance on market valuation for tax purposes. The updated guidance sets out the ATO’s views on a range of matters, including:

  • The definition of market value for tax purposes;
  • Who can determine market value for tax purposes;
  • Valuation fundamentals for tax purposes, including:
    • (i) eight guiding principles;
    • (ii) valuation approaches and methods;
    • (iii) expectations in relation to valuation reports, including common issues; and
  • The ATO’s approach to reviewing valuations.

Valuing an asset (or a liability) for tax purposes is complex. Talk to our KMT tax adviser if your business needs to obtain a valuation for tax purposes.

Source: ATO

Talk to our KMT tax adviser to make sure you are utilising any available concessions.

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances and get professional advice from a qualified accountant at KMT Partners.