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The small business tax concessions
In May 2018, the Board of Taxation (the Board) commenced a review of the small business tax concessions (the Review). Dr Mark Pizzacalla, the Chair of the Review and a member of the Board, recently confirmed in a TaxBanter Tax Yak Podcast (episode 30, recorded on 18 September 2019) that the Board has now concluded its review of the concessions available to small businesses and provided its final report to Government. The report has not yet been publicly released.
This article summarises the suite of small business concessions in the taxation laws, as well as concessions which have been extended to medium-sized businesses.
What is a ‘small business’?
A small business entity for tax purposes
Division 328 of the ITAA 1997 sets out a number of tax concessions that are available to a ‘small business entity’ (SBE).
An SBE is defined in s. 328-110. A taxpayer is an SBE for an income year where:
- it carries on a business in the income year; and
- one or both of the following applies:
- the taxpayer carried on a business in the previous income year and the aggregated turnover for that year was less than $10 million; and/or
- the taxpayer’s aggregated turnover for the current year is likely to be less than $10 million.
* Prior to 1 July 2016, the turnover threshold for an SBE was $2 million.
An entity’s aggregated turnover (s. 328-115) for an income year is the sum of the annual turnovers of the entity, its connected entities and its affiliates. It excludes, broadly, income derived from dealings between these related parties.
An entity’s annual turnover (s. 328-120) for an income year is its total ordinary income derived in the ordinary course of carrying on a business. It excludes non-assessable non-exempt income, sales of retail fuel and GST. Income derived from dealings with associates is taken into account at arm’s length value, and income must be annualised using a reasonable estimate where the entity did not carry on business for the whole of the income year.
While this definition of an SBE — and the turnover threshold of $10 million — applies for most small business tax concessions, some concessions are subject to a lower turnover threshold which many SBEs cannot access, and some concessions are subject to higher thresholds and are therefore available to businesses that are not ‘small’ businesses. The eligibility thresholds of the concessions discussed below range from $2 million to $50 million, which adds complexity to concessions purportedly designed to simplify the tax system for smaller businesses.
The small business market
According to the ATO, there are approximately 3.8 million small businesses — i.e. turnover of less than $10 million — including 1.6 million sole traders. In an industry speech delivered in May 2019, Deputy Commissioner Deborah Jenkins said that small businesses:
- employ more than 5.5 million people;
- contribute $380 billion to the national economy;
- comprise more than 99 per cent of all Australian businesses;
- contribute 15 per cent of total income tax and 23 per cent of total GST collected by the ATO;
- owe $15 billion in collectable debt, accounting for almost two-thirds of all debts owed.
‘Small business’ under other laws
The concept of ‘small business’ differs across not only the various taxation regimes, but also between different laws and regulators.
Common definitions include the following:
Australian Bureau of Statistics (ABS)
The ABS defines a small business as one that employs less than 20 people.
Fair Work Australia (FWA)
For FWA purposes, a ‘small business employer’ is one with fewer than 15 employees (s. 23 of the Fair Work Act 2009). Amongst other things, a small business employer is subject to different unfair dismissal rules (s. 388), and is exempt from an obligation to make redundancy payments (ss. 119 and 121).
Australian Securities and Investments Commission (ASIC)
For corporations law and ASIC purposes, a ‘small proprietary company’ is defined in s. 45A(2) of the Corporations Act 2001 (CA) as a company which satisfies at least two out of three threshold tests in relation to the income year. Most small proprietary companies are exempt from the requirements to prepare financial reports in accordance with Part 2M.3 of the CA.
The thresholds were doubled — by regulation — with effect from 1 July 2019.
|Test||Threshold pre- 1 July 2019||Threshold from 1 July 2019|
|Annual revenue of less than:||$25 million||$50 million|
|Consolidated gross assets of less than:||$12.5 million||$25 million|
|Number of employees at the end of the income year is fewer than:||50||100|
Tax concessions for small business
Income tax concessions
1.Threshold – aggregated annual turnover < $50 million
The corporate tax cuts and instant asset write-off were originally legislated to provide tax relief for small businesses. By the end of the 2018–19 income year, both of these concessions had been extended to entities with annual aggregated turnover of less than $50 million.
Lower company tax rates
Prior to 1 July 2015, the corporate tax rate was 30 per cent for all companies. Since the 2015–16 income year, a lower tax rate has been available for eligible companies that do not exceed the relevant turnover threshold, amongst other conditions. Originally designed to provide tax relief for smaller companies, the legislated tax cuts are now available to companies with an aggregated turnover of less than $50 million.
For the 2015–16 and 2016–17 income years, the lower corporate tax rate was available to SBEs as defined in s. 328-110. From the 2017–18 income year, the lower corporate tax rate is available to an entity that is a ‘base rate entity’ (BRE). Under the definition in s. 23AA of the Income Tax Rates Act 1986, a company is a BRE for an income year if:
- no more than 80 per cent of its assessable income for the income year is ‘base rate entity passive income’ (as defined in 23AB of the Income Tax Rates Act 1986); and
- its aggregated turnover for the income year is less than the relevant threshold for that year.
The following table summarises the lower corporate tax rates and the aggregated turnover thresholds that apply for each income year.
|Income year||< Aggregated turnover threshold||Lower tax rate|
|2015–16||$2 million (SBE)||28.5%|
|2016–17||$10 million (SBE)||27.5%|
|2017–18||$25 million (BRE)||27.5%|
|2018–19 to 2019–20||$50 million (BRE)||27.5%|
|2020–21||$50 million (BRE)||26%|
|2021–22 and later||$50 million (BRE)||25%|
Instant asset write-off
Under the instant asset write-off rules, an eligible business can immediately deduct the cost of a depreciating asset where the cost of the asset is less than the relevant threshold, and the taxpayer acquires the asset, and first uses the asset or installs it ready for use, within a certain date range.
Before 7.30pm (AEDT) on 2 April 2019, the concession was only available to SBEs under s. 328-180 (i.e. aggregated turnover of less than $10 million). From that time, s. 40-82 of the ITAA 1997 extends the availability of the concession to ‘medium-sized businesses’ with an aggregated turnover of between $10 million and less than $50 million until 30 June 2020.
The eligibility criteria have changed over the years, as summarised in the below table.
|Acquisition date range||Asset costs* less than …||Taxpayer’s aggregated turnover is less than …|
|From 1 July 2020 (unless extended again)||$1,000||N/A|
|7.30pm (AEDT) 2 April 2019 to 30 June 2020||$30,000||$50 million|
|29 January 2019 to before 7.30pm (AEDT) 2 April 2019||$25,000||$10 million|
|1 July 2016 to 28 January 2019||$20,000||$10 million|
|7.30pm (AEST) 12 May 2015 to 30 June 2016||$20,000||$2 million|
|1 January 2014 to before 7.30pm (AEST) 12 May 2015||$1,000||$2 million|
|1 July 2012 to 31 December 2013||$6,500||$2 million|
|1 July 2011 to 30 June 2012||$1,000||$2 million|
* Cost excludes GST where the entity is registered for GST and entitled to claim an input tax credit.
If an entity seeks to use the instant asset write-off, they must use the pooling rules in Subdiv 328-D of the ITAA 1997 for any assets whose cost exceeds the above thresholds (currently $30,000). See Simplified depreciation — pooling below.
2.Threshold – aggregated annual turnover < $20 million
Eligibility for the research and development (R&D) tax incentive does not rely on the SBE definition (whether or not modified) unlike the other statutory concessions discussed in this article. However, the concession available nonetheless depends on the company’s turnover and amount of R&D deductions.
R&D tax incentive
Section 355-100 of the ITAA 1997 sets out the rules relating to a company’s entitlement to the R&D tax offset.
A company is entitled to a refundable tax offset equal to 43.5 per cent of its R&D deductions if:
- its eligible notional R&D deductions are between $20,000 and $100 million; and
- its aggregated turnover for the income year is less than $20 million.
A 38.5 per cent non-refundable tax offset applies in other circumstances. Further, the rate of the offset is reduced to the company tax rate for the portion of the company’s eligible notional R&D deductions that exceed $100 million.
3.Threshold – aggregated annual turnover < $10 million
The following concessions adopt the s. 328-110 definition of SBE without modification as part of their eligibility criteria.
Simplified depreciation – pooling
Subdivision 328-D of the ITAA 1997 allows an SBE to choose use a ‘general small business pool’ for depreciation purposes (s. 328-185). Broadly, the costs of the SBE’s depreciating assets (other than those eligible for immediate write-off) are allocated into a single pool. The pool is depreciated as a single asset at a rate of 30 per cent diminishing value each year (15 per cent in the year in which an asset is first allocated).
Simplified trading stock rules
Subdivision 328-E of the ITAA 1997 modifies the trading stock rules in Div 70 of the ITAA 1997. Under s. 328-285, an SBE can choose not to account for their trading stock for an income year where the difference between the value of the trading stock on hand at the start and end of the income year (based on a reasonable estimate) is not more than $5,000.
Small business restructure roll-over
The small business restructure roll-over in Subdiv 328-G of the ITAA 1997 allows an SBE to access a roll-over where the SBE transfers the ownership of its assets without changing the ultimate economic ownership, as part of a genuine restructure.
The roll-over disregards the gains and losses that arise as a result of the transfers of CGT assets, depreciating assets and trading stock, and ensures that the restructure is tax-neutral.
Under s. 328-430, each party to the transfer must either:
- be an SBE;
- has an affiliate that is an SBE;
- is connected with an entity that is an SBE; or
- be a partner in a partnership that is an SBE.
NOT YET LAW
Exposure draft legislation titled Treasury Laws Amendment (Measures for a later sitting) Bill 2019: miscellaneous amendments — released on 6 September 2019 — proposes to amend s. 328-430(d) of the ITAA 1997 to allow an entity that is connected with or an affiliate of an SBE to access the small business restructure roll-over in relation to an interest of the SBE even if the small businesses entity has aggregated turnover of between $2 million to $10 million. Currently, while the roll-over is available to the entity carrying on the business, entities associated with an SBE were only able to access the roll-over if the SBE was a CGT SBE — i.e. had an aggregated turnover of less than $2 million.
Immediate deduction for professional expenses for start-ups
Section 40-880(2A) of the ITAA 1997 allows an immediate deduction for certain costs incurred in starting up a business. The expenditure must be fees for relevant professional advice, or government fees, taxes and charges.
Immediate deduction for prepayments
Under s. 82KZM of the ITAA 1936, if an SBE makes a prepayment for the doing of a thing that is not to be wholly done within 13 months, then the deductibility of the prepayment is apportioned over the period to which is relates (unless it is excluded expenditure, e.g. an amount less than $1,000).
Two-year amendment period
The time period within which the Commissioner may amend an assessment is reduced from four years to two years for an SBE (s. 170 of the ITAA 1936).
4.Threshold – aggregated annual turnover < $5 million
When the turnover threshold for the definition of an SBE was increased from S2 million to $10 million with effect from 1 July 2016, the eligibility threshold for the small business income tax offset was increased to only $5 million. The discount rate which determines the amount of the offset has been legislated to increase in line with the reduction in the tax rate for companies.
Small business income tax offset
Individuals who derive net business income from an unincorporated small business — i.e. income from sole trading activities, and distributions of business income directly from partnerships and trusts — with an aggregated turnover of less than $5 million (since 2016–17) are eligible for a discount on the income tax liability on that business income. The discount is available in the form of a tax offset and it is capped at $1,000 per taxpayer per year.
Section 328-355 of the ITAA 1997 provides that in order for the individual to be eligible for the tax offset, the relevant business (individual, partnership or trust) must be an SBE as modified by s. 328-357 of the ITAA 1997, which reduces the turnover threshold from $10 million to $5 million.
The discount rate is as follows:
|Income year||Aggregated turnover threshold||Discount rate|
|2015–16||$2 million||5 per cent|
|2016–17 to 2019–20||$5 million||8 per cent|
|2020–21||13 per cent|
|2021–22 and later income years||16 per cent|
5.Threshold – aggregated annual turnover < $2 million
The $2 million turnover threshold — an alternative to the $6 million maximum net asset value test — to access the small business CGT concessions did not change when the SBE definition was amended to include entities with an aggregated turnover of less than $10 million from 1 July 2016.
Small business CGT concessions
Division 152 of the ITAA 1997 contains the four small business CGT concessions: the 15-year exemption, the 50 per cent reduction, the retirement exemption and the replacement asset roll-over.
Section 152-10 sets out the basic conditions which must be satisfied in order to access any of the concessions. They include that the taxpayer is a ‘CGT small business entity’ (CGT SBE), which is an SBE, assuming that the turnover threshold was $2 million instead of $10 million. Where the taxpayer passively holds the CGT asset which is used in a business carried on by an affiliate or a connected entity, the affiliate or the connected entity must be a CGT SBE.
The following concessions (some are which are legislative and some of which are administrative) all have an eligibility threshold of aggregated turnover of less than $10 million.
^ Also applies to entities that do not carry on a business (e.g. a not-for-profit) and the annual GST turnover does not exceed $2 million.
Also applies to businesses with 19 or fewer employees even if they do not meet the turnover test.
This applies to a company that is an SBE, is an annual payer, and has business and/or investment income of $2 million or less (as well as other entity types)
Single Touch Payroll reporting concessions
Single Touch Payroll (STP) — in Div 389 of Schedule 1 to the TAA — became mandatory for small employers (i.e. employers with fewer than 20 employees on 1 April 2018) on 1 July 2019, but the ATO granted an extension until 30 September 2019.
The ATO has provided reporting concessions for ‘micro employers’ and employers with ‘closely held’ payees. While there is no turnover threshold to be eligible for these reporting concessions — and there is no requirement that an eligible employer be a ‘small business’ (however defined) — in practice, it is likely that most eligible employers would be smaller businesses.
Employers with closely held payees
A closely held payee is one who is not at arm’s length from the employer, e.g.:
- family members of a family business;
- directors or shareholders of a company;
- beneficiaries of a trust.
The STP reporting concessions available to employers in respect of their closely held payees are as follows:
Deferred start date
Small employers are not required to report information related to closely held payees until 1 July 2020. However, information in relation to all arm’s length employees must be reported from 30 September 2019 (or a deferred start date granted by the ATO).
The employer will still need to provide the closely held payees with a payment summary by 14 July 2020 and lodge a Payment summary annual report (PSAR) with the ATO by 14 August 2020 in respect of the 2019–20 income year.
When small employers begin to report closely held payees from 1 July 2020, they may choose to report information relating to those payees quarterly. The quarterly STP report will be due at the same time as the business’s quarterly BAS.
The employer will need to make reasonable estimates each quarter of the amounts paid to closely held payees, using one of the following methods:
- total withdrawals taken by the payee (other than dividends or repayment of liabilities);
- 25 per cent of the total salary or directors’ fees from the previous income year;
- varying the previous year’s amount (to account for trading conditions) within 15 per cent of the total salary or directors’ fees for the current income year.
Information related to arm’s length payees must be reported at the time of payment.
Employers that have only closely held payees, and meet a compliance test (broadly, that they are up to date with their PAYG and tax return compliance), are currently eligible for the closely held lodgment concession for the PAYG withholding payment summary annual report (the PSAR). The due date of the PSAR under the concession is the due date of the employer’s tax return. Otherwise, the PSAR is due on 30 September where the employer lodges through a registered agent, or 14 August for self-lodgers and all large withholders.
Employers that report information relating to all of their employees under STP are not required to lodge a PSAR.
A micro employer is one with one to four employees. They may choose to use any of the following options for simplified STP reporting:
No cost or low cost STP solutions
Micro employers who do not need payroll or accounting software can choose a simple no cost or low cost (i.e. $10 per month or less) STP solution.
A list of these solutions is available on the ATO website.
Micro employers can choose to report quarterly through a registered tax or BAS agent until 30 June 2021. The STP report is due each quarter at the same time as the employer’s quarterly BAS is due.
The registered agent must have applied for the concession on behalf of the employer by 30 September 2019.
A micro employer is not eligible for this concession if it has amounts owing to the ATO that are not subject to a payment plan, or has outstanding lodgment obligations.
The Board’s review
In May 2018, the Board released its Review of Small Business Tax Concessions — Consultation Guide (the Consultation Guide).
The Consultation Guide lists the principles which the Board developed to evaluate the current and future suite of tax concessions for small business:
- Concessions should be designed having regard to the small business life cycle.
- Concessions can assist with small business cash flow.
- Concessions should relieve the compliance burden for small business.
- Concessions should promote growth and innovation.
- Concessions should be targeted and affordable.
- Concessions should not incentivise complex structuring.
The Consultation Guide contains 14 questions for consultation.
- What tax issues are of particular concern for small businesses?
- What do you regard as the most useful or effective small business tax concessions? Why?
- What opportunities do you see for improving existing small business concessions?
- Which current small business concessions are not working and/or should be removed? Why?
- What ideas do you have for new concessions that could help small businesses?
- Do you agree with the reform principles outlined in this document? Are there any other principles that should be considered? Why?
- Should certain principles be prioritised over others? Why?
- What are the objectives of small businesses using a particular legal structure (companies, trusts, partnership, sole trader)?
8.1 What are the main objectives businesses have when they seek structuring advice (for example, reducing tax liabilities, succession planning, asset protection, etc.)?
8.2 Relative to other factors, how important is reducing tax liabilities?
- Are small business tax concessions skewed to specific parts of the small business lifecycle? If so, should they be refocused and in what way?
- Generally, tax concessions are broadly based and apply across different sectors of the economy. Should there be small business tax concessions for specific sectors? If so, why?
- Does the small business eligibility criteria (for example, the $2m turnover threshold for small business CGT concessions) influence you to not want to grow your business?
11.1 Are there alternative mechanisms to phase-out small business tax concessions as opposed to a hard cut-off?
- What changes to the tax system would make it simpler and reduce the compliance burden for small business?
- Should the definition of small business for tax purposes be changed? If so, how?
- Does technology make it easier to comply with your tax obligations and access small business concessions? Why or why not?
What will be in the Board’s report?
The objectives and scope of the Review (see page 13 of the Consultation Guide) indicate what will be in the Board’s final report.
It will contain recommendations on how to efficiently target tax relief to small business. Where appropriate, the Board will suggest approaches that minimise any revenue cost.
The scope of the Review was for the Board to:
- determine the effectiveness of the current small business tax concessions;
- examine whether the current mix of small business tax concessions:
- represents the best distribution of current Government expenditure on small business tax concessions;
- are commercial appropriate in the context of the various stages of the small business life-cycle;
- consult the small business community to gauge views on the current suite of small business tax concessions;
- consider relevant international experience and identify best practice initiatives.
The Board’s Review does not cover the STP reporting concessions or the dispute resolution and guidance mechanisms outlined in this article.
Tax guidance and dispute resolution for small business
There are a number of services dedicated to assist small businesses to handle their tax and superannuation affairs.
Small business newsroom
The ATO has a website which contains information, webinars and support specifically for small businesses.
National Tax Clinics
The National Tax Clinic program is a Government-funded initiative. The clinics are offered across 10 universities around Australia. Unrepresented small businesses, individuals and not-for-profits can receive free tax and superannuation advice and support from students studying tax-related courses, under supervision of a qualified clinic manager.
Small business assist – live chat
The ATO hosts the Small Business Assist service which includes:
- a Live Chat function — for GST, ABN, AUSkey, BAS, account enquiries and to update details, available from 3.00pm to 8.00pm (AEDT) Monday to Friday and 10.00am to 2.00pm (AEDT) on Saturday; and
- an after hours call back service — to book a time to speak to the ATO from 6.00pm to 8.00pm Monday to Thursday.
Dispute resolution assistance
The ATO’s Dispute Assist service is a free service to help unrepresented individuals and small businesses that lodge objections and are suffering from significant or exceptional circumstances.
Individuals or small businesses can use the ATO’s in-house facilitation service. This is a mediation process where an impartial, professionally trained ATO facilitator assists in resolving the dispute.
Independent review — small business pilot
On 1 July 2018, the ATO commenced a 12-month pilot to offer an independent review service to eligible small businesses disputing income tax audits in Victoria and South Australia. The pilot has been expanded to eligible small businesses nationally, and extended until 31 December 2020. From 1 October 2019, the scope has been expanded to include some GST and indirect tax audits.
An independent technical officer from outside the audit area reviews the merits of the audit position before the assessment or amended assessment is issued. Small businesses will be notified by their audit case officer if they are eligible to participate in the pilot.
Small Business Concierge Service
The Office of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) assists small businesses to resolve disputes. Its Small Business Concierge Service helps small businesses decide if an application to the Tribunal for review of an ATO decision is an appropriate pathway to resolution. The Concierge Service will guide and support the small business through the Tribunal process, including a one-hour consultation with an experienced small business tax lawyer for $100.
Small Business Taxation Division of the Tribunal
The Small Business Taxation Division of the Tribunal came into operation on 1 March 2019. It features a lower application fee, a dedicated case manager, and decisions to be issued within 28 days of a hearing.
The ATO will be represented by internal ATO officers (other than in exceptional cases). The officers will be drawn from the independent Review and Dispute Resolution business line.
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