Think you are getting a tax concession? You had better read these rules carefully

The Government says it is keen to help small business and to ease its regulatory and compliance burden. It has got its work cut out. By TERRY HAYES of Thomson Legal & Regulatory.

By Terry Hayes

The new Federal Government says it is keen to help small business and to ease the regulatory and compliance burden on that sector.

One area of tax compliance for small business where significant improvement could be made is in making the small business tax concessions easier to access.

How do I qualify?

Under the current tax law, which has applied since 1 July 2007, to qualify for the tax concessions a small business (described in the tax law as a small business entity) must have an annual turnover of less than $2 million.

Even if the business qualifies in one year, it will have to check each year to see if it still qualifies. If turnover increases over the threshold, the business will cease to qualify for the concessions.

There are detailed rules to determine when and how a small business works out its turnover for these purposes.

For example, total turnover (which will include the turnover of any other business that the small business operator controls) for the previous year may be used, or an estimate of current year turnover, or actual turnover.

Annual turnover includes things like sale of trading stock, interest earned on business bank accounts, and fees for services provided. Note that whatever method is used must be used for any and all affiliated and controlled businesses (and there are separate tests to determine what is affiliated and controlled).

Once the basic annual turnover test is met, an SME may qualify for a surprisingly wide range of tax concessions.

CGT concessions

For example, there are four capital gains tax (CGT) concessions available:

• The 15-year exemption – an individual small business taxpayer is entitled to a full exemption from CGT regarding, for example, the sale of an asset that is subject to CGT where the asset has been continuously held for 15 years, the taxpayer is at least 55 years old, and the sale of the asset occurs in connection with the retirement of the taxpayer. The 15-year exemption has priority over the other small business CGT concessions.
• 50% concession – a capital gain on an “active asset” (see below) used in the business can be reduced by 50% if certain conditions are met.
• Retirement exemption – basically, a taxpayer can elect to disregard a capital gain on the sale of a business asset up to a lifetime limit of $500,000. If the taxpayer is under 55 at the time of choosing to apply this concession, the amount of the gain must be rolled over to a complying super fund or retirement savings account within the specified time limits. If the taxpayer was 55 years or over, the gain can be taken tax-free. This exemption cannot be used if the 15-year exemption applies.
• Rollover for replacement assets – in essence, where assets are sold and replaced by new assets, any capital gain on the sale of the old assets can be ignored up to the value of the replacement asset.

In addition to satisfying the small business entity $2 million turnover test, to be eligible for the above concessions, the CGT asset that gives rise to the gain must be an “active asset” – in essence, an asset used, or held ready for use, in carrying on the business.

Not surprisingly for our tax laws, there are other conditions surrounding this active asset test that need to be met – too complicated to explain here, but your accountant should be able to advise.

These CGT concessions are useful, but as you can see, there are many hoops to jump through to gain access to them.

Other concessions

There are other concessions available where the $2 million turnover test is met, but care is needed because there may be further conditions to be satisfied to access these. These concessions include:

• Being able to account for GST on a cash basis – that is, you only need to account for GST when payment for the sale in question is received by the business.
• Being able to pay GST by instalments.
• Access to simpler trading stock and depreciation rules – for example, can claim an upfront deduction for most assets costing less than $1000 each.
• Prepaid expenses – can claim an upfront deduction for prepaid business expenses that cover a period of 12 months or less that ends in the next financial year.
• FBT on car parking – for those SMEs in affected city locations, satisfying the $2 million turnover test can lead to an exemption for FBT on car parking for employees. Again, however, other conditions apply.

The concessions can result in some very useful tax savings. But there are conditions that must be met and it is always advisable to seek good advice about this. If “life wasn’t meant to be easy”, tax was certainly “not meant to be simple” it seems!

Terry Hayes is the senior tax writer at Thomson Legal & Regulatory , a leading Australian provider of tax, accounting and legal information solutions.

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