What are the small business concessions?

It's possible for small businesses to qualify for a number of different tax breaks, both as an operating entity and when they sell their company. These concessions have the potential to improve cash flow from year to year and greatly reduce or even eliminate the amount of tax that is owed upon the sale of a corporation.

If you are aware of these concessions, it can help your company make better decisions regarding the investments in assets and the restructuring of the firm. This article outlines and provides explanations for the many forms of special tax discounts for small businesses.

Because running a business keeps you rather busy, it's easy to forget about the assistance that's available to you. The fact that the government provides a variety of useful concessions that can make a substantial difference to a small business's annual tax bill is something that many smaller enterprises are unaware of.

These can include lower tax rates, asset write-offs, simpler depreciation standards, and tax-free restructuring depending on the amount of revenue that your company generates each year.

Lower-income tax rates

Lower overall company tax rates are a significant benefit offered to small business entities (SBEs). If the total turnover of your company is less than $50 million for any of the financial years 2018–19 or 2019–20, you may qualify for an income tax rate of 27.5 percent instead of the standard rate, which is progressive. This tax rate will reduce to 26% in the 2020-21 fiscal year, and it will fall further to 25% in the 2021-22 fiscal year and subsequent years after that.

When compared to the tax rates that apply to personal income and sole proprietors as well as the full company tax rate of 30 percent, these reduced rates for the taxation of companies provide a sizeable saving.

Another advantageous provision is the instant asset write-off, which enables qualified companies to quickly deduct the cost of a depreciating asset as long as the asset does not cost more than $30,000 in total. This concession is presently available, and will remain so until the 30th of June in 2020, to commercial companies whose combined annual sales are less than $50 million.

Asset depreciation made easy

The regulations for streamlined asset depreciation can be another beneficial tax concession for small and medium-sized enterprises (SBEs) with an aggregate yearly turnover of less than $10 million.

These enable you to "pool" the business component of higher-cost assets (those ineligible for rapid write-off), and you can deduct 15% of the asset's value in the year you begin using it. Then, if the residual balance is less than the limit for the instant write-off of assets, you can claim a deduction of 30% each year after that and deduct the whole balance of the pool at the end of the year.

An SBE has the option of "not to account" for its trading stock in a given income year if the difference between the amount of the trading stock on hand at the beginning of the income year and the value of the trading stock on hand at the conclusion of the income year is less than $5,000.

Roll-overs under SBE reorganisation

Another helpful tax concession allows small and medium-sized enterprises (SBEs) to take advantage of something called a "rollover," which occurs when the ownership of an entity's assets is transferred as part of a true business reorganisation but the final economic ownership remains the same.

Because of this, any gains or losses resulting from the transfer of assets subject to capital gains tax (CGT), assets subject to depreciation, and trading stock to a new business organisation will not be counted. As a result, there will be no tax liability associated with the restructuring.

There is a tax break available for certain expenses that are incurred during the "beginning stages" of a small business enterprise (SBE). All expenses associated with professional advice as well as government fees, taxes, and levies are immediately deducted from taxable income.

In addition, the Australian Taxation Office (ATO) has a shorter "time period" (two years) to revise a business tax assessment for a small business entity, as opposed to the regular time period of four years.

Offset for small business income taxes

Small and medium-sized enterprises (SBEs) who conduct their business as unincorporated businesses (such as sole traders) and have an annual revenue of less than $5 million are eligible to get a "small business income tax offset," which is a desirable tax concession.

This concession, which takes the form of a tax offset, reduces the amount of income tax you are required to pay for company income. The amount of this reduction is limited to $1,000 per taxpayer, per year. The discount rate was 8% in the 2019-20 fiscal year, rising to 13% in the 2020-21 fiscal year, and then rising to 16% in the 2021-22 fiscal year.

When it comes to the sale of assets, small and medium-sized enterprises (SBEs) with annual revenues of less than $2 million are eligible for beneficial "CGT concessions." If you are eligible, these concessions can reduce the amount of capital gains tax that must be paid when selling assets from a firm, which results in significant tax savings.

Furthermore, a great number of SBEs are eligible for concessions that enable them to employ the "Simpler BAS" standards, account for GST on a cash basis, and pay GST in instalments. They also have the ability to perform a yearly apportionment of the input tax credits that they have.

Under the FBT rules, small and medium-sized enterprises (SBEs) may be eligible for exemptions on "vehicle parking" and "work-related devices," and they may pay their PAYG tax obligations in "instalments."

What is tax on capital gains?

When you sell any investment, you are required to pay tax on the profit gained from the sale of the investment's capital gain. The abbreviation for this tax is "CGT," which stands for "capital gains tax."

If an individual sells an asset that produces income and makes a profit, such as real estate, a vehicle used for business, or shares of stock, they will have a capital gain that is subject to taxation. This capital gain is utilised in the calculation of the CGT liability that is owed by the company or the individual for the current fiscal year.

Small business and CGT

The commercial sector of Australia's economy is made up of a large number of small enterprises. In comparison to larger corporations, the Australian Taxation Office (ATO) acknowledges that smaller enterprises are in a distinct position that warrants special treatment. As a consequence of this, small businesses are eligible for four different CGT concessions for the sale of any asset they own, including real estate, in the future.

Basic requirements for the capital gains tax breaks for small businesses

Before we get into the specifics of the concessions, it is essential to have a solid understanding of the four primary steps that are involved in deciding whether or not the asset's owner satisfies the fundamental requirements outlined by the ATO. In the event that the owner can demonstrate compliance with the requirements, the small company concessions will be applied to the CGT event involving the asset.

If the asset in discussion is a contribution in the business or trust, as well as the conditions surrounding membership interests in a partnership, the four steps take a look at a variety of factors, such as the total turnover of the company as a whole, whether the asset in question is considered an active asset by the Australian Taxation Office (ATO), and so on. In addition, the order in which the steps are performed should be taken into consideration.

Due to the potential complexity of the criteria for each test, we always advise that owners of small businesses check with their accountants to evaluate whether or not they satisfy the requirements for each phase.

The CGT exemptions for small businesses

Once the fundamental requirements have been satisfied, the owner is eligible to make use of any relevant small business CGT concessions when selling the asset in question, which could be a piece of property or any other asset that the company uses in its daily operations.

15-year exemption

If a small firm has possessed an active asset for 15 years, and the proprietor is age 55 or older, retiring, or permanently unable to work, then any capital gain is exempt from CGT. This exemption also applies if the business owner is permanently unable to work.

If the 15-year exemption is satisfied, there is no longer any requirement to evaluate a capital gain, and the owner will not be required to file for any additional concessions.

The 15-Year Exemption enables a company owner to overlook the entirety of the capital gain made on the sale of their business premises without incurring any further tax liability. In order to be eligible for the 15-Year Exemption, an SMSF member must first satisfy the fundamental conditions and then have owned the premises for the preceding 15 years leading up to the CGT event in question. The CGT event must have occurred because the member is at least 55 years old and has retired from their business; alternatively, the member can be any age but must be permanently unable to work at the time of the CGT event.

If the sale of the company premises is eligible for the 15-Year Exemption, then the individual can contribute part or all of the total proceeds from the sale to their SMSF. If the sale does not qualify for the 15-Year Exemption, then the member cannot contribute any of the proceeds from the sale. After that, they have the option of choosing to have the contribution count against the lifetime CGT ceiling, which is presently set at $1,515,000 (for 2019/2020). If they do this, the contribution will be classified as a CGT cap contribution.

The contribution towards the CGT cap must be made into the SMSF no later than the later of the following days:

• the day that the member is due to file their income tax return for the income year in which the CGT event occurred, whichever comes later;
• The capital proceeds are given to the member thirty days after the day they were earned.

In order for the member's contribution to be counted as a CGT cap contribution, they need to fill out a CGT cap election form (NAT 71161) and hand it over to their SMSF at or before the time that the contribution is made. This must be done at or before the time that the contribution is made.

50% active asset reduction

Active asset reduction is an option that can be considered for the small firm in the event that it does not qualify for the 15-year exemption but still satisfies the fundamental parameters.

The capital gain that an active asset generates for a small business can be reduced by up to fifty percent. After any capital losses have been deducted from the capital gain and the CGT reduction of fifty percent has been applied, if this is an acceptable deduction, it can be applied to the value that is left over.

Retirement exemption

If specific criteria are met, retirees may qualify for an exemption from the 50% active asset reduction that can be used in addition to or in place of the active asset reduction. A lifetime cap of $500,000 applies to the amount of exempted capital gains from the sale of active assets that can be realised under this exemption.

However, if the owner of the small firm is under the age of 55, the exempt amount has to be put into a super fund or retirement funds account that complies with the regulations.

Because of the Retirement Exemption, a member of an SMSF is able to disregard all or part of a capital gain that resulted from the sale of business premises. The capital gains tax exemption can be claimed for a maximum of $500,000 in income.

If an SMSF member fulfils the basic conditions and is below the age of 55 when they receive the sale proceeds, then they are required to make the disregarded capital gain of up to $500,000 to their SMSF. This contribution can only be made if the member is under the age of 55 when they receive the sale proceeds. In order to be eligible for this exemption, the member does not have to contribute the amount of the ignored capital gain if they are 55 years old or older.

The SMSF member is not required to give up their business in order to qualify for the retirement exemption. In addition, the amount of money that can be put into a self-managed super fund (SMSF) comes from the "disregarded capital gain," not the revenues from the sale.

To be eligible for the exemption, members who are under the age of 55 must deposit the capital gain that was disregarded to their SMSF by the later of the following dates:

• the day that they are due to submit their tax return for the year in which the CGT event occurred, whichever comes later;
• the day on which the profits of the capital sale are received.

Members who are aged 55 or over and who choose to contribute the overlooked capital gain to their SMSF are required to do so in one of the following ways:

• the day that they are due to submit their tax return for the year in which the CGT event occurred, whichever comes later;
• 30 days after obtaining the proceeds from the capital investment.

Rollover

A small business may be able to defer all or a portion of a capital gain from the selling of an active asset for a period of two years or longer if the following conditions are met: the business purchases a replacement asset; the business incurs expenses on making capital improvements to an existing property; the business sells the active asset.

Additional CGT events may take place if particular conditions are not satisfied by the time the replacement asset period comes to an end. Because there are many complexities involved with CGT events, we strongly suggest that you consult with your accountant, as they are the only ones who are qualified to offer guidance on CGT events.

Depreciation and capital gains tax for small enterprises

If the owner of a small business also owns the commercial property on which it is located and claims depreciation for the property, this can have an effect on the cost base of the small business. Because the cost base of the property is factored into the calculation of any capital gain realised from the sale of the property, this might result in a higher capital gains tax bill.

Thousands of dollars' worth of depreciation deductions are available to any and all small businesses, regardless of whether the company owns the property or rents space there. In contrast to residential tenants, commercial tenants are permitted to make tax deductions for the cost of any fit-outs they build. Carpet, desks, and storage are all examples of common examples.

BMT Tax Depreciation has successfully finished the preparation of hundreds of tax depreciation plans for a wide variety of commercial buildings. Depreciation deductions have enabled BMT to assist thousands of small business owners in maximising their cash flow. BMT is aware that each and every property has its own unique characteristics.

Contribution in-specie to the capital gains tax ceiling made to an SMSF

Some members may wish to make an in-specie contribution to their SMSF by transferring their business premises into it. This will allow them to take advantage of CGT concessions that are available to small businesses. This tactic is popular among members who have closed down their company but would still like to maintain an interest in the building in which their company was housed.

In many private binding rulings, the Australian Taxation Office (ATO) has indicated that in-specie contributions of active assets, such as actual business property, may not meet the criteria for the lifetime capital gains tax cap. This is the case when the in-specie contribution is also the CGT event that eligible for the small business capital gains tax concessions.

It is possible for members of an SMSF who want to transfer their commercial property as an in-specie contribution and qualifying for the small business CGT concessions to agree to let their SMSF purchase the business premises from them. This is one of the options that is available to them. This is assuming that their SMSF has the available means to acquire the premises outright or is able to obtain a loan under an arrangement that limits their liability for the loan.

With this strategy, not only will their SMSF own the property, but the cash profits from the sale of the property will also be able to be contributed back into their SMSF in the form of a capital gains tax cap contribution, which is eligible for a small business CGT concession.

Only business real property, which is defined as a premise that is utilised totally and solely in any business, can be bought by an SMSF, and members of an SMSF need to be informed of this fact in the event that an SMSF purchases a premise from them (i.e. a related party owner). In addition to this, the property in question must be free of any liens or encumbrances before it may be transferred to their SMSF. The purchase of the property needs to adhere to market standards in terms of both price and terms of sale.

In circumstances in which their SMSF doesn't have sufficient funds available to acquire the asset and the funds are loaned from them (i.e. a related party), the SMSF trustee should make sure that the loan conforms with the safe harbour regulations as specified by the ATO in Practice Compliance Guideline 2016/5. These guidelines outline the requirements that must be met for a loan to be considered compliant with the safe harbour provisions.

When a member sells multiple active assets at once, they may want to think about triggering a capital gains tax event related to one of the assets and then using the small business capital gains tax concession to make an in-kind contribution of a different asset rather than using the capital proceeds from the sale of one of the active assets. In its publication Tax Determination 2010/217, the ATO has affirmed that this is within the realm of permissibility.

The Australian Taxation Office (ATO) has confirmed in this publication that a taxpayer who has sold an asset that was eligible for the $500,000 Retirement Exemption may contribute a different asset within the CGT cap in place of the cash profits that they have received from the sale of the asset.

Deductions

Your total income is reduced after tax deductions are subtracted from the amount that is considered taxable, and you are only responsible for paying tax on the remaining income. Your tax deductions will not be paid back to you in any way.

Costs that are incurred in the operation of your business may be deducted from your taxable income, provided that they are not considered personal or domestic expenses (such as fees for childcare). Expenses for entertainment and other such items are not included in this calculation.

The following are examples of common business expenses that can be deducted:

• expenses related to advertising and phone calls
• travelling for business
• fringe benefit tax
• the costs of motor vehicles
• asset depreciation, which might include things like plant and equipment
• include income, earnings, and contributions to superannuation
• the costs of repairs and maintenance
• there are fees involved with operating your business from your home.

In most cases, the yearly revenue of your company must be less than $2 million for it to be considered a small business and so eligible for certain tax breaks.

You are free to select the concessions that work best for your company, provided that you satisfy any requirements that are related with them. You will be required to review your eligibility for these concessions on an annual basis in order to establish whether or not you still qualify.

Timing issues must be taken into consideration in order for a member of an SMSF to be eligible for the small business capital gains tax concessions, to disregard some or all of the capital gain resulting from the sale of their business premises, and to be able to make a CGT cap contribution into their SMSF. The individual will need to sell the business premises first; after that, they will be required to pay either the proceeds from the sale or the exempt capital gain as a CGT cap contribution. This contribution can be made in the form of cash or in the form of property.

When both the CGT event and the in-specie contribution stem from the same event, a member who is trying to qualify for small business CGT concessions cannot transfer their firm premises as an in-specie contribution to qualify for those concessions.

Because of this, the decision to disregard the entire capital gain or just a portion of it and the decision to contribute an amount up to the CGT ceiling cannot both be made at the same time. Both the event that triggers the CGT and the contribution to the SMSF have to take place at different dates.

The CGT concessions for small businesses are complicated and rely on the particular circumstances of each member. Prior to making any contribution, members of SMSF should check with their professional advisers to confirm that they are eligible to claim the applicable concession.