Small businesses are the lifeblood of our economy, employing almost half of our nation’s total workforce and deserve all the assistance that they can get in the battle to compete with not only large Australian competitors but also the online presence of ecommerce stores.
What many small business owners are often not aware of is the vast range of concessions that the ATO has available and how they can benefit the operations and management of your small businesses finances.
Sadly, many small business advisors don't communicate these 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 prior to 30 June 2016 or $10 million from 1 July 2016 onwards, and carrying on an active business activity.
Lets break down these concessions into three broad categories:
- Income tax concessions
- Good and services (GST) concessions
- Pay as you go (PAYG) instalment concessions
What are income tax concessions?
Income tax concessions for small businesses apply in four broad categories.
1. Simpler depreciation rules
From 1 July 2012 small businesses are allowed to claim an immediate deduction for assets costing up to $6,500.00, 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.
2. Entrepreneurs tax offset
This tax offset was equivalent to 25% of a small businesses total income tax payable on business income. Note that this only applied to small businesses with gross annual turnover under $50,000.00. This concession was terminated as at 30 June 2012.
3. 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 $5,000.00 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 $5,000.00 range.
4. Deductions for prepaid expenses
The general rule is that any prepaid expenses exceeding $1,000.00 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 twelve months.
As an example, you can pay your insurance policies in June for the next twelve months and claim the total amount as a tax deduction in the June period, rather than apportion the expense over a twelve-month period.
What are GST 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.
1. 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 the 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 its been realised.
2. For some small businesses the nightmare of calculating your GST for a quarter can be lessened by just paying pre-calculated GST instalments from the ATO. If eligible, the ATO will notify you of the GST instalment 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 partway through a financial year.
3. 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.
What are PAYG instalment concessions?
For small businesses that are required to report and pay PAYG income tax instalments, 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.
As previously mentioned, this can be a great way of reducing the compliance burden but small businesses should be careful to monitor their PAYG instalments in relation to their business income as paying excessively high instalments and waiting until the end of the year for them to be refunded can be a major drain on cash flow.
Whilst 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 close up shop and move into retirement.
The point of mentioning this is to highlight that 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.
I guess 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.
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