It’s said that over 96 per cent of Australian businesses are small businesses, truly the ‘engine room of the economy’.
Recognising the importance of small business to employment and innovation, our tax system has for many years offered a series of valuable tax-breaks to businesses which are classified as small.
In the last year or so however, many new tax breaks have been introduced and some existing ones have been turbo-charged, so what exactly are the tax goodies available to your small business?
But before that, what businesses actually qualify for the tax breaks? What is a small business? Until 30 June 2016, a small business is classified as one with an annual aggregated turnover of less than $2 million. From 1 July 2016, the rules are being relaxed as that turnover threshold will increase to $10 million in respect of most – though sadly not all – of the tax breaks.
$20k write-off – take advantage
A year after it was first introduced, one of the best tax breaks for small business remains – the $20k instant asset write-off. With many businesses offering End of Financial Year deals, now is the ideal time to take advantage by acquiring some essential capital assets and, at the same time, reducing taxable profits.
Recent research by H&R Block and Officeworks showed that less than 1 per cent of small businesses were fully aware of what they could claim, and 68 per cent hadn’t taken full advantage of the relief. So, by way of a quick refresher, these are the key features of the instant asset write-off:
- Businesses can buy and instantly write-off any items of machinery or equipment for use in their business, provided the cost of the asset is less than $20k. This could include motor vehicles, office furniture, and items of technology like laptops, mobile phones and tablets, plus kitchen equipment
- Provided they are used for business purposes, for instance in work recreation areas or office receptions, it is even possible to claim items like TVs, gym equipment, art and computer consoles. If you’re claiming more left-field deductions, make sure you keep a full paper trail
- The relief is available for all eligible purchases right through until June 30 2017, however to maximise cash flow benefit it makes sense to make purchases close to the end of the financial year
- Only assets valued at $20k or less (excluding GST) qualify for the instant deduction. So, if the value of the asset is greater than $20k, the asset will be depreciated over a number of years
- The deduction is available for both new and second hand assets. The ability to claim for second hand assets is particularly useful for motor vehicles. Not many new vehicles would qualify, but plenty would qualify as second hand vehicles
- Where multiple items are purchased and each costs less than $20k, the whole cost of each item can be written-off straight away
- The relief works by reducing your taxable profit by the amount spent. This means that you get relief at either the small companies rate of tax (currently 28.5 per cent) if you run your business through a company or at your personal marginal rate of tax if you are a sole trader, or operate through a partnership
As noted above, the relief is scheduled to expire on 30 June 2017, after which the old rules (which require assets to be written off over their effective lives) will come back into force.
Help for capital gains tax
The special small business CGT concessions are in addition to the 50 per cent general CGT discount applying to individuals, trusts and super funds (but not companies).
There are four CGT concessions that may be available to eliminate or reduce capital gains made by a small business or its owners where it disposes of business assets, including goodwill, trademarks and business premises but not so-called “passive” assets such as an investment portfolio.
The reliefs are available to businesses which are small business entities (ie, they carry on a business and satisfy the $2m turnover test) or where the net CGT assets of the taxpayer (plus its connected entities and affiliates) do not exceed $6.
Note that the increase in the small business turnover threshold to $10m does not apply to these CGT concessions; the only $2m turnover test will remain.
1. The 15 year exemption. Available where a taxpayer who is at least 55 years of age and is retiring disposes of a CGT asset that has been owned for a minimum of 15 years.
2. The retirement exemption. A taxpayer may apply capital proceeds from the disposal of a CGT asset to the retirement exemption, up to a lifetime maximum of $500,000 – as it is not necessary to actually retire, the concession can be utilised more than once.
3. The 50 per cent active asset reduction. The capital gain arising from the disposal of a CGT asset may be discounted by 50%, but there are specific rules about what qualifies.
4. The CGT rollover. A capital gain arising from the disposal of a CGT asset may be deferred provided a replacement asset is acquired within a two year period – the gain is deferred until disposal of the replacement asset.
Don’t blur the lines between the company’s money and your own. Many small businesses get caught out by the so-called ‘deemed dividend’ rules. Under tax law, loans and advances to private company shareholders or their associates are deemed to be taxable unfranked dividends for the shareholders. The intention of these rules is to stop the profits of private companies being distributed to shareholders as tax-free “loans”.
So, if you find yourself borrowing money out of the company of which you’re a shareholder, try to ensure those borrowings are repaid by the time the company’s tax return for the year is due. If that isn’t possible, declare a dividend and treat the amount as income, in which case, the dividend would be franked if applicable. Alternatively, enter into a complying loan agreement, complete with commercial interest and capital payments and a defined loan period.
Look out too for the tax consequences of the private use of company assets for less than market value, because this can also be caught by the deemed dividend rules. The amount of the deemed dividend is equivalent to the arm’s length price that would have been paid for the use of the assets, less any amount actually paid for the use.
To get round that, it’s worth considering transferring the asset to the shareholder in lieu of a cash dividend, a so-called ‘in-specie’ dividend. Whether that’s cost-effective will depend on what the market value of the asset actually is. Alternatively, if the shareholder has previously lent money to the company, the asset could be transferred to the shareholder as a repayment of that loan, subject to valuation.
Mark Chapman is the Director of Tax Communications, H&R Block and an Officeworks EOFY Expert