There are several small business concessions in Australian tax law. They cover many types of tax – income tax, capital gains tax, GST, fringe benefit tax and payroll tax.
When business decisions are made many businesses lose the tax benefits of small business concessions without realising it at the time. They should have sought tax law advice.
Not losing small business status can preserve wealth. Loss can arise from ill-informed decisions, for example, if without tax planning you:
- start new business arrangements,
- set up a new business structure, or
- restructure an existing business.
To avoid loss, you and your tax law adviser must understand the available concessions and relevant tax law definitions. Here is an introduction.
What is small business for tax purposes?
If the annual aggregate turnover of the business is less than $2 million, the business will be considered as a small business for tax law purposes. Plan ahead to minimise the possibility of loss of the small business status.
What tax benefits exist for small business?
Some significant concessions available to a small business are:
- immediate write off for low cost depreciating assets and motor vehicles;
- avoiding bringing into account changes in the value of trading stock unless the change exceeds $5,000;
- exemption from fringe benefits tax on car parking provided to small business employees; and
- exemption from payroll tax if average wages do not exceed certain specified limits.
The range of capital gains tax concessions are available even if the aggregate turnover equals or exceeds $2 million, provided the business satisfies the maximum asset test.
What is the definition of aggregate turnover and related terms?
It is clear from the definition of small business that “aggregate turnover” is the determining factor. The aggregate turnover of an entity is the sum of the:
- entity’s annual turnover for the income year; and
- annual turnover of any entity that is connected or affiliated with the entity.
Therefore relevant are both the turnover of the business and the turnover of entities that are connected to the business and its affiliates.
Small business status is lost if the turnover of the business when added to the turnover of a connected entity or an affiliate is equal to or more than $2 million.
This aggregate turnover definition depends on definitions of connected entities and affiliate.
Connected entities: An entity will be connected with another entity if either entity controls the other entity or both entities are controlled by the same third entity. Control can be direct or indirect.
Affiliate: The definition of affiliate is full of traps. An individual or company will be an affiliate of another entity if the individual or company acts, or could reasonably be expected to act, in accordance with the entity’s directions or wishes, or in concert with the entity, in relation to the affairs of the business of the individual or company. Family members of the owner of the business carrying on other businesses but involved in the business may be taken to be affiliates. A spouse or a child under 18 can be an affiliate.However to be an affiliate of a business the relevant entity when conducting its business must act in accordance with the wishes of the business. The answer will depend on the facts of each case.
Clearly, no arrangements, structuring or restructuring of a small business should be undertaken without considering the small business status of the business. Tax planning and more broadly legal advice will minimise the possibility of losing beneficial status under Australian tax law.
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