Are you a small business? What are the benefits?

WHAT WAS A SMALL BUSINESS?

Up to June 30, 2016 a business would be a “small business” if its turnover is less than $2 million. There are many benefits of being a small business rather than a “big business”. Some of the main benefits are:

Depreciation

You can immediately write-off of most depreciating assets that cost less than $20,000 each that were bought and used or installed ready for use from May 12, 2015 until 30 June 30, 2017.  Yes this June!

Assets over $20,000 can be pooled and a 15 per cent deduction can be claimed in first year and then 30pc each year after.  Note, if you are not a small business the depreciation rates are often much lower as they are based on the expected life of each asset.  For example a tractor would be depreciated at 16.67pc instead of 30pc.  This is a big advantage of being a small business;

You can write-off the balance of your small business pool if the balance is less than $20,000.

Restructure rollover relief

From July 1, 2016, small businesses can (may be able to) change the legal structure of their business without incurring any income tax liability when business assets are transferred by one entity to another.  This rollover applies to business assets that are CGT assets (eg land), livestock or depreciating assets.  This new provision may open up new opportunities for restructuring depending on your circumstances.

Company tax rate cut

For income years commencing after July 1, 2015, the small business company tax rate has been reduced from 30pc to 28.5pc.  Importantly this applies to companies that run a business, not to companies that receive a trust distribution (bucket companies).

Capital gains tax

The small business CGT concessions are extremely generous.  Depending on how you choose to apply them resulting capital gains tax can be reduced or deferred to effectively be nil.  If you meet the definition of a small business tax payer, it doesn’t matter what size the capital gain is.  Millions of dollars in tax can be saved if you are in a position to access these concessions.  They are very complex and you should never assume you are entitled to them without getting professional advice.

WHAT IS A SMALL BUSINESS NOW?

In the 2016/17 Budget the Government announced an increase to the small business entity turnover threshold from $2 million to $10 million.  This is intended to take effect from July 1, 2016. Importantly this does not apply to capital gains tax.  Importantly also, this intention has not yet been made law.

As such we have a somewhat confusion situation where you may now be a small business for depreciation purposes for example, but not for capital gains tax purposes.  You could be both a small business and a big business!  There is no law that says the tax law needs to make sense!

In the meantime

Until the proposed increase from $2 million to $10 million is legislated, the ATO have indicated taxpayers can either carry on applying the current law or take a punt and assume the legislation will eventually be enacted.  If you make the wrong choice you will be able to amend your tax returns accordingly.  They say they won’t penalise you, but you will have to pay the extra tax if needed.

Any readers who’s turnover is over $2 million, for example who buy a buggy for under $20,000 won’t know for sure if they will get the immediate write off promised. Hopefully parliament passes the legislation soon.

Check your turnover

With the current high cattle prices, many beef producers who’ve always been under the $2 million threshold, may now be over it and likely to stay that way.  The proposed threshold increase to $10 million if legislated will keep “business as usual” for depreciation and write offs etc, but you may lose eligibility to the Small Business CGT Concessions.

Small business CGT concessions

If your turnover is likely to go over $2 million and you would have a large capital gain if you sold your property, think about your plans.  If it is your intention for your family to take over the property, it may be possible to gift it to them now while you are still a small business. This could result in minimal if any capital gains tax being payable.  Your family members receiving the property would be deemed to have purchased it at market value.  Hence you may be able to reset the cost base of the property to the current market value. 

The State government has removed any stamp duty on any interfamily transfers so this once prohibitive cost should no longer apply. 

Note if you pass the property to the family when you die via your will, they will inherit your cost base and this chance to reset the cost base won’t be available.

Once you are no longer a small business for capital gains tax purposes, capital gains tax could make transferring properties very expensive.

Whether or not you are a small business can have major consequences to your tax position and therefore to the success of your business.

All information provided in this article is of a general nature. It does not take into account personal financial circumstances. Tailored professional advice should be sought before acting.

Please contact Flor-Hanly on (07) 4963 4800 or email admin@florhanly.com.au