SBEs can include companies, partnerships, trusts or sole traders.
To qualify as an SBE the following two criteria must be met:
CARRYING ON A BUSINESS
To be an SBE you must in the first place be carrying on a business. The long-standing ATO tax ruling in this area is Taxation Ruling Tr 97/11 which contains the following series of factors that may indicate that a business is indeed being carried on:
- There is a significant commercial purpose or character
- There is more than a mere intention to engage in business
- There is a repetition and regularity to your activities – and some genuine time spent on the activity
- The business is carried on in a similar way to others within the same industry
- There is organisation to your activity
- There is size and scale to the activity
- It is not a hobby or a form of recreation
Leaving aside the tax concessions on offer, carrying on a business (as distinct from a hobby) brings with it a range of tax obligations.
TURNOVER <$2 MILLION
If you are carrying on a business, you will be an SBE if your aggregated annual business turnover (i.e. gross profit) is less than $2 million. This includes the turnover of:
- Connected entities – an entity is connected with another entity if: either entity controls the other, OR both entities are controlled by the same third entity.
- Affiliates – an affiliate is any individual or company that, in relation to business affairs, acts or could reasonably be expected to act: According to your directions or wishes, OR In concert with you. The aggregation rules ensnare quite a number of related businesses – requiring them to add their annual turnover together and as a result potentially take them over the $2 million threshold.
The $2 million turnover threshold is absolute. If it is exceeded by even $1, your business will be ineligible for many SBE concessions on offer. If your business’s turnover is around $2 million, it’s worth keeping a close eye on it at financial year-end. If your turnover is nearing the threshold at financial year-end, it certainly pays to stay under that threshold from a tax perspective.
Some of the concessions available to SBE are
IMMEDIATE DEDUCTIONS FOR PREPAID EXPENSES
As an SBE you can claim an immediate deduction for certain prepaid business expenses where either of the following 2 conditions is met:
- The payment is for a period that is 12 months or less and ends on or before the last day of the income year in which the expense is incurred, or
- The prepaid expense is “excluded expenditure” which is defined as expenditure that is:
- Less than $1,000 (GST-exclusive) or
- Prepayments that are required to be made under a law or by court order under the Commonwealth, State, or Territory (e.g. car registration, workers compensation, etc) or
- Made under a contract of service (e.g. salary and wages).
TRADING STOCK RELIEF
Conducting a stock-take usually involves physically counting your stock and valuing each item. This can be a time-consuming process. Rather than conduct an end-of-year stock-take in order to account for changes in the value of your trading stock, as an SBE you can elect not to conduct a stock-take where there is a difference of $5,000 or less between:
- The value of your stock on hand at the start of the income year and
- A reasonable estimate of the value of your stock on hand at the end of the income year
INSTANT ASSET WRITE-OFF
2016/2017 is the final year for SBEs to take advantage of the $20,000 instant asset write-off and provide your business with cash-flow relief. Until 30 June 2017, SBEs can claim an immediate write-off for most depreciating assets used in their business if the asset cost less than $20,000.
Being in its final year of operation the timing requirements around the instant asset write-off are important. To claim a deduction in 2016/2017, the asset must be first acquired from 1 July 2016 and first used or installed ready for use in your business on or before 30 June 2017. Assets acquired before 1 July 2016, but first used or installed ready for use between 1 July 2016 and 30 June 2017 are also claimable in full in 2016/2017. If you miss the deadline (i.e. if the asset is not being used in your business or installed ready for use on or before 30 June 2017) then the write-off threshold reverts to $1,000. Missing the deadline will result in a worse cash-flow outcome for your business than if the deadline is met. Assets costing $20,000 or over are depreciable at a rate of 15% in the first year, and then 30% in subsequent years.
SIMPLIFIED PAYG INSTALMENTS
SBEs that report and pay PAYG instalments quarterly can elect to pay instalment amounts worked out for them by the ATO (known as ‘Option 1’). This ATO fixed dollar amount is then printed on quarterly Activity Statement at label T7 or your instalment notice. Adopting this option can save you time in working out the instalment amount you need to pay. It also removes the risk of under or over estimating PAYG instalments and the resulting penalties that may be applied by the ATO. You can choose this option in your first quarter of the income year. Once chosen, this option applies for the whole of the income year.
SIMPLIFIED GST INSTALMENTS
In a similar vein, SBEs may be eligible to pay their GST liability on an amount worked out for them by the ATO – therefore, decreasing administration time for business. The ATO will notify eligibility on your business’ first quarterly Activity Statement for the year (generally the September quarterly Statement). If this method is used’ the client must inform the ATO by selecting this option on that Activity Statement.