Many small business owners are unaware of the various concessions available to them through the Australian Taxation Office and how they can benefit their business. Here, our resident accounting expert John Corias explains what you need to know.
Sadly, many small business advisors don't communicate these ATO concessions to their clients until it’s too late and business decisions have already been made. For the purposes of these concessions, the ATO defines a small business as having a total annual turnover of less than $2 million and carrying on an active business activity. Let’s break down these concessions into three broad categories.
Income tax concessions
Income tax concessions that apply to small businesses apply in four broad categories:
- Simpler depreciation rules: From 1 July 2012 small businesses are allowed to claim an immediate deduction for assets costing up to $6,500. This allows for a greater deduction in the year that the cash outlay occurs, as certainly assists small businesses to keep their equipment up to date.
- Entrepreneurs tax offset: This tax offset was equivalent to 25 per cent of a small businesses total income tax payable on business income. Note that this only applied to small businesses with a gross annual turnover under $50,000. This concession was terminated as at 30 June 2012.
- Simpler trading stock rules: For small businesses that have stock on hand at any point in time conducting an annual stock take can often take considerable time and be a real nightmare to manage. Thankfully the tax office is willing to acknowledge this and allows for simpler trading stock rules. By taking advantage of the simplified rules, you only need to report changes in your trading stock balances if the amount changes by more than $5,000 from year to year. This applies whether the value of your stock goes up or down. You are then able to perform a reasonable estimate to value your stock within that $5,000 range.
- Deductions for prepaid expenses: The general rule is that any prepaid expenses exceeding $1,000 in value must be apportioned between financial years. The small business concession allows you to claim the expense up front provided that the prepayment of the expense is not for a period that exceeds 12 months. As an example, you can pay your insurance policies in June for the next 12 months and claim the total amount as a tax deduction in the June period, rather than apportion the expense over a 12-month period.
Goods & Services tax concessions
The ATO has three broad concessions for small businesses that go some way towards minimising the compliance burden of preparing, lodging and paying for your quarterly BAS forms.
- Small businesses with turnover under the $2 million threshold are permitted to account for GST on their BAS forms on a cash basis. What this means is that you only remit GST to the ATO based on income that has been physically collected by your small business, and not on invoiced, but uncollected income. This provides a major cash flow boost for small businesses and prevents paying out money before it’s been realised.
- For some small businesses the nightmare of calculating your GST for a quarter can be lessened by just paying pre-calculated GST installments from the ATO. If eligible, the ATO will notify you of the GST installment that you simply pay each quarter. You can then worry about reconciling your total GST obligations for the year when your income tax return is prepared, which can lessen the amount of time spent shuffling paperwork. Of course, this concession and method of reporting can have its disadvantages if you end up in a refundable position part way through a financial year.
- Private apportionment rules allow small businesses, often-sole traders that have expenses that are partly for business and partly for private purposes to worry about the apportioning process at the end of the year. This again, provides some relief from having to spend time reviewing receipts and transactions until the year-end process of doing your annual financial accounts.
Pay As You Go installment concessions
For small businesses that are required to report and pay PAYG income tax installments, the ATO will pre-determine your PAYG amounts based on the most recently lodged income tax return for you. This will free you up from having to perform your own calculations and means just one end of year reconciliation process when your income tax returns are prepared. This can be a great way of reducing the compliance burden but small businesses should be careful to monitor their PAYG installments in relation to their business income as paying excessively high installments and waiting until the end of the year for them to be refunded can be a major drain on cash flow.
While these are the major areas where the ATO looks to assist small businesses in reducing the time spent on complying with their requirements, there are also a raft of Capital Gains Tax Concessions that apply when it comes time to sell your small business or simply closing up shop and moving into retirement. But being in a position to take advantage of any of these small business concessions requires careful planning and consideration of all aspects of your small business prior to deciding on a legal structure or implementing accounting procedures. The old adage of, ‘to be forewarned is to be forearmed’ certainly applies when it comes to getting the maximum benefit out of the ATO small business concessions.