Running a business is a path full of challenges. Not only do you need to get the appropriate licenses to run your business, but you also have to search for the right customer base for your business. And when this is paired with a hundred (if not more) other tasks essential to keep your business going, things can be overwhelming.
However, among these tasks, one thing that can’t be ignored is the cash flow. You need to look for ways that can boost your cash flow, and for that, small business concessions can be extremely helpful.
Small business concessions can help you reduce your tax payments. In order to qualify for these tax concessions, the annual turnover of your business must be below a certain threshold. Along with this, a couple of other conditions need to be fulfilled as well.
So, if you want to know whether your business is eligible for these concessions, keep reading.
What Are Concessions?
Before going into detail, it is good to think about how to define a concession. They can encompass several different aspects. Generally, small business concessions refer to a tax reduction. These can help with tax reductions when a business owner is starting out.
Aside from these, concessional contracts may also include the payment of allowances for your operation or other things that have an indirect effect on your business. In some instances, the concession means that the buyer doesn’t actually pay GST on any purchase.
Depending upon your business structure, your annual turnover and your industry, you may be eligible for some tax concessions.
If a business has an aggregated turnover of less than $2 million, it can access the small business CGT concessions. However, for an aggregated turnover of less than $ 5 million, the business can access the small business income tax offset. When this turnover is below $10 million, the small business restructure roll-over is there. You can find more about these on the ATO’s website.
Before applying for any of these, you will need to check the eligibility criteria first. Let’s have a look at the eligibility criteria for the following:
Small business CGT concessions
To qualify for any of the CGT concessions, it’s crucial to meet the fundamental eligibility criteria.
However, it’s important to note that depreciating assets don’t align with these basic eligibility conditions:
Under the uniform capital allowance system, any profit or loss arising from a depreciating asset becomes part of your assessable income or is deductible as a balancing adjustment. This applies to the extent that the asset was used for a taxable purpose, i.e., business use. It’s essential to recognize that the small business CGT concessions do not extend to gains made on depreciating assets included in your income.
In cases where you generate a capital gain or loss from a depreciating asset used for a non-taxable purpose, such as private use, the resulting capital gain doesn’t qualify for the small business CGT concessions. This is because it reflects the non-business utilization of the asset.
It’s worth noting that, apart from the small business 50% active asset reduction, all other concessions come with additional requirements that must be fulfilled.
How to Check if you are an eligible entity?
In order to qualify, you must fall into one of the following categories:
- Be classified as a CGT small business entity with an aggregated turnover of under $2 million
- Not actively operating a business (except as a partner), but have your asset utilized in the small business of your affiliate or connected entity (CGT concessions on passively-held assets)
- Be a partner within a partnership that qualifies as a small business entity. In this case,
- Your asset is either an interest in a partnership asset (partnership assets) or
- It is an asset you own that isn’t an interest in a partnership asset (partner’s assets) but is used within the partnership’s business.
- Moreover, you need to satisfy the maximum net asset value test.
The ATO has given steps that you can follow to ensure that you are eligible for small business CGT concessions.
Small Business income tax offset
The small business income tax offset or unincorporated small business tax discount can reduce the tax amount you need to pay by up to $1,000 every year.
The proportion of tax payable on the business income is used to work out this tax offset.
To qualify for eligibility, you should be actively conducting a small business as a sole trader or have a portion of net small business income derived from a partnership or trust.
It’s essential that the small business in question maintains an aggregated turnover of under $5 million.
The ATO will calculate your offset by referencing your income tax return, taking into consideration the following factors:
- Net small business income earned in your capacity as a sole trader.
- Your share of net small business income originating from a partnership or trust.
Small business restructure roll-over
The small business restructure roll-over lets small businesses transfer the active assets from one entity to another and they will not incur an income tax liability.
The roll-over is applicable if, in the income year of the transfer, each party involved falls into one of the following categories:
- a small business entity
- an entity connected with a small business entity
- an entity with an affiliate that is a small business entity
- a partner in a partnership who qualifies as a small business entity
You qualify for the small business restructure roll-over if:
You are an eligible entity with an aggregated turnover of less than $10 million.
Starting from July 1, 2016, you transfer active assets classified as capital gains tax (CGT) assets, trading stock, revenue assets, or depreciating assets from one entity (the transferor) to one or more other entities (transferees).
The asset transfer is a genuine restructure of an ongoing business, not driven by artificial or inappropriate tax considerations.
The transaction should not result in a change to the ultimate economic ownership (individuals who, directly or indirectly, own an asset) of the transferred assets. If there is more than one individual with ultimate economic ownership, each individual’s share must be maintained.
The determination of whether a restructure is genuine relies on all the facts surrounding the restructure.
To offer clarity to small business owners, a safe harbour rule is incorporated, providing an alternative method to fulfil the requirement that a restructure is genuine.
Still confused?
Understanding different small business tax concessions can be a task in itself. In case of any confusion, it is recommended that you reach out to the official website of the ATO (Australian Taxation Office).
However, if you want help regarding your business taxes, Clear Tax Accountants is here for you. Thanks to our team of professional and experienced tax accountants, we can easily take care of your tax matters for you.
So, contact Clear Tax Accountants today and enjoy the ease of handling your taxes.
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