Small business tax offset and other concessions play a vital role in lowering your taxes and improving cash flow, however rules around these can be hard to follow without adequate technical knowledge. Concessions can change from year to year as well, making it all the more difficult for business owners to identify the latest tax saving opportunities.
POP Business has supported many clients in claiming the right deductions and optimise their tax position over the years. Let us give you an overview of the key small business tax concessions – without unnecessary technical jargon.
How much tax does a small business pay in Australia?
We’ll start with the small business tax rate Australian companies pay.
The small business tax rate applicable to your business depends on how it’s structured. If you operate as a sole trader for example, the income from your commercial activities is taxed as part of your personal income. This means you can offset your taxable income up to the tax-free threshold limit, which is $18,200 for 2020-21. Income beyond $18,200 is assessed at tiered tax rates ranging from 19% to 45%.
However, if you operate a small company, it’s assessed as a separate entity with no tax-free thresholds, which means tax is payable on every dollar earned by the company. The full tax rate is 30% but small companies may qualify for a lower tax rate, which is 26% for 2020-21.
What is a small business?
Before we move on to small business tax offset, it’s important you know what a small business is.
Sole traders, partnerships, companies and trusts can all qualify as a small business, provided they operate as a business and have a turnover of less than $10 million during the tax year.
This $10 million turnover limit is the basis for many concessions, but there are exceptions to this so it’s a good idea to study the eligibility criteria for every concession and deduction you want to claim.
Also, you should check whether you’re still considered as a small business every year.
Small business income tax offset
The small business tax offset is available to sole traders or those with a share of small business income from a partnership or trust. It can reduce your tax payable by up to $1,000 each year.
You don’t have to claim the offset as the ATO works out your entitlement when you submit your tax return. Their calculations are based on the proportion of tax payable on your business income. You’ll see the amount of offset you’ve been given on your Notice of Assessment.
To be eligible, your small business must have a turnover of less than $5 million.
Instant asset write-off
Another useful small business concession is the instant asset write-off, which allows you to claim an immediate tax deduction for the cost of a business asset in the first year it’s used (or ready to be used).
This means you’ll receive a deduction for buying a car for business in Australia, or any other equipment and tools you need for your commercial activities.
The cost of each asset needs to be less than a prescribed threshold, which is currently $150,000 if it is purchased by 31 December 2020. Your turnover must be less than $50 million for your business to be eligible.
You’ll also need to use simplified depreciation rules to claim the instant asset write-off.
Australia R&D tax incentive
If you have spent at least $20,000 in research and development (R&D) activities during the tax year, then it’s worth checking whether you’re eligible for R&D tax incentives. Businesses with a turnover of less than $20 million can get a 43.5% rebate or cash back from the ATO on eligible R&D expenditure.
The R&D tax incentive is available to Australian “for-profit” companies that conduct research and development locally.
R&D is a tax area with substantial tax saving opportunities but also complicated eligibility rules. To find out whether your business qualifies for R&D rebates, it’s important to consult an experienced tax expert such as POP Business. For more information, head over to our R&D Tax Incentive article.
Professional expenses for start-ups
When you start a small business, you could be entitled to a range of deductions including professional, legal and accounting advice, as well as government fees and charges.
This lowers the cost of getting expert help on fundamentals like how to structure and register your business, as well as financial modelling of cash flows, forecasts and feasibility analyses.
Start-up deductions are also available for businesses with turnover of less than $50 million.
Simplified trading stock rules
From 1 July 2021, businesses with a turnover of less than $50 million can choose not to carry out a stocktake, unless the difference between your stock value at the start of the year and the end of year estimate is more than $5,000.
Basically, this concession allows you to report an estimated stock value in your tax return instead of an actual value based on a stocktake.
Whether you report an estimated or actual amount, you’re still required to account for the changes in the value of your stock.
Cash accounting for GST
Businesses with turnover of less than $10 million can account for GST on a cash basis, which means GST is payable only for sales where you have received payments. On an accrual basis, you’ll need to pay GST when an invoice has been issued, even if the money hasn’t come in yet.
For small businesses, cash flow is far easier to manage under the cash accounting method.
In this article, we have provided a brief overview of key tax concessions that can make a huge difference for small businesses. These are particularly vital right now, given our economy is still recovering from COVID-19 disruptions.
If you would like to know more about these concessions or any other potential tax saving opportunities, contact POP Business. From tax compliance, company setup to virtual CEO services, our experts can provide you with affordable advice so you can build a strong business.