Small business entities election
If your client wishes to take advantage of the Concessions for small business entities, then eligibility for those concessions must be reviewed each year.
If the taxpayer carried on a business at any time during the year and has an aggregated turnover of less than $2 million or is a former STS taxpayer.
You need to know:
Use the Tax Small business entity worksheet (sbe) to assist with the decision making and to calculate aggregated turnover. The 'sbe' can be opened by:
Entering Yes in the 'Quick access to Small Business Entity worksheet' box, at this item, or
Click SBE in the Depreciation worksheet (d) Index.
Entering Yes in the 'Quick access to Small Business Entity worksheet' box, at item P10
It will be necessary each year to answer the 2 basic questions:
Are you carrying on a business?, and
Is the aggregated turnover of the business less than $2 million?
Where one or both of the answers to these 2 questions is No, access to the Simplified depreciation small business pools will not be given.
For taxpayers previously in the STS, the General and Long-life STS pools will be rolled into the General and Long-life small business pools.
New Small Business Entity Rules
From the 2008-2009 income year small businesses with an aggregated turnover of less than $2 million are called small business entities and may qualify for a range of tax concessions.
Eligible businesses can choose to use the concessions that best suit their needs. It is not necessary to elect to be a small business entity each year in order to access the concessions. Nevertheless, eligibility must be reviewed each year.
While the STS is no longer in operation all of its concessions remain available to eligible businesses.
A small business entity may be eligible for the following concessions:
Capital gains tax (CGT) 15-year asset exemption
CGT 50% active asset reduction
CGT retirement exemption
CGT roll-over provisions
Simplified depreciation rules
Deducting certain prepaid business expenses immediately
Simplified trading stock rules
Accounting for GST on a cash basis
Annual apportionment of GST input tax credits
Paying GST by quarterly instalments
Fringe benefits tax car parking exemption
PAYG instalments based on GDP-adjusted notional tax
Some of these concessions have specific eligibility conditions that must also be satisfied.
Eligibility
The sole trader will be a small business entity if they are carrying on a business and have an aggregated turnover of less than $2 million.
Aggregated turnover is the sole trader's annual turnover plus the annual turnovers of any entities that are connected with the sole trader or are affiliates (adjusted to ignore dealings between connected entities or affiliates).
Eligibility must be review each year.
Calculating Turnover
Turnover includes all ordinary income the sole trader earned in the ordinary course of business for the income year. The following are some examples of amounts included and not included in order income.
INCLUDE THESE AMOUNTS
Sales of trading stock
Fees for services provided
Interest from business bank accounts
Amounts received to replace something that would have had the character of business income, for example a payment for loss of earnings
DO NOT INCLUDE THESE AMOUNTS
GST charged on a transaction
Amounts borrowed for the business
Proceeds from the sale of business capital assets
Capital gains
Amounts received from repayments of farm management deposits
Special rules
There are special rules for calculating the turnover if the sole trader has retail fuel sales or business dealings with associates that are not at market value.
Use the SBE Eligibility worksheet at item S1 to assist in calculating aggregated turnover. Also visit the ATO website for very detailed information.
Special rules called the aggregation rules will determine who the sole trader is connected or affiliated with. These rules prevent larger businesses from structuring or restructuring their affairs to take advantage of the small business entity concessions.
An entity that is connected with the taxpayer or that is its affiliate is referred to as a relevant entity. When calculating the sole trader's aggregated turnover, do not include:
income from dealings between the taxpayer and a relevant entity
income from dealings between any of the taxpayer's relevant entities, and
income from a relevant entity when it was not the taxpayer's relevant entity
If the taxpayer is not connected or affiliated with any other entities and its business turnover is less than $2 million, then the taxpayer is a small business entity.
Business operated for only part of the year
If the taxpayer, or a relevant entity, carries on a business for only part of the income year, annual turnover must be worked out using a reasonable estimate of what the turnover would have been if the taxpayer, or a relevant entity, had carried on a business for the whole of the income year.
Satisfying the Aggregated Turnover Threshold
There are three (3) ways to satisfy the $2 million aggregated turnover requirement, but most businesses will only need to consider the first method.
Business operated for only part of the year
If the taxpayer's aggregated turnover for the previous income year was less than $2 million, it will be a small business entity for the current year.
This is regardless of its estimated or actual aggregated turnover for the current year.
For the purpose of working out the taxpayer's aggregated turnover for the previous year, the rules about aggregated turnover apply as if they had been in force for the 2007-08 income year.
Estimate of current year turnover
If the taxpayer's estimated aggregated turnover for the current income year is less than $2 million, it will be a small business entity for the current year.
If you are estimating the taxpayer's turnover you need to assess whether it is more likely than not to have less than $2 million aggregated turnover as at the first day of income year or, if it started a business part way through the year, as at the time the business started, The taxpayer's turnover should be based on the conditions you are aware of at the beginning of the income year or, if the business was part way through the year, at the time the business started. Companies that commenced carrying on a business in the current year need to make a reasonable estimate of what their turnover would have been had the business been carried on for the entire year.
This method cannot be used if the taxpayer's aggregated turnover in each off the previous two income years was $2 million or more.
Actual current year turnover
If the taxpayer's actual aggregated turnover is less than $2 million as at the end of the income year, it will be a small business entity for that year.
This method is only needed if the first two tests cannot be met.
It is important to note that if the taxpayer is a small business entity by means of this method only, it cannot use the GST and PAYG concessions for that income year as those particular concessions must have been chosen earlier in the income year.
Former STS Taxpayers
Although the STS has now ceased, the taxpayer may continue using the STS accounting if they:
were an STS taxpayer for the most recent income year starting before 1 July 2005 and continued to be an STS taxpayer to the end of the 2006-07 year;
have been using the STS accounting method for the 2005-06 and 2006-07 income years, and
were a small business entity in the 2007-08 income year.
If the taxpayer meets these three requirements, they can continue using the STS accounting method until they choose not to or they are no longer a small business entity.
Treatment of depreciating assets for former STS taxpayers who are Small business entities in the current income year is covered at Item P8 expense label M.
If the taxpayer continues to use the STS accounting method, base the amounts included at item P8 on the STS accounting method. If the accounting system or financial statements do not reflect the STS accounting method, the taxpayer may need to make additional reconciliation adjustments at Reconciliation items at item P8.
If the taxpayer had a particular type of ordinary income or general deduction that had to be apportioned or altered under STS - for example, double wool clips or pre-payment of a business expense for a period greater than 12 months - you continue to apportion or alter them and make adjustments at Reconciliation items.
Business income and expenses that have not been accounted for using the STS accounting method - because they had not been received or paid during the previous income year - are accounted for in the current income year. You may need to make additional reconciliation adjustments at Reconciliation items.
The STS accounting method does not apply to income or deductions that receive specific treatment under income tax law - for example, net capital gains, dividends, depreciation expenses, bad debts and borrowing costs.
Where the taxpayer has depreciating assets that have been rolled into the Small business pools but had exited the former STS, depreciation calculated in the pools must be included at item D15 - Other deductions.
CCH References
7-050 Small business entities - aggregated turnover
7-130 Affiliates or connected entities
7-370 Paying GST by quarterly instalments
7-515 Special rules for deducting pre-paid expenses
7-530 FBT car parking exemption
7-540 Small business depreciation
17-015 Depreciating assets