Concessions for small business entities

Transcription

1 Guide for small business operators Concessions for small business entities Information to help you work out the concessions you can use. For more information visit NAT

2 OUR COMMITMENT TO YOU We are committed to providing you with advice and guidance you can rely on, so we make every effort to ensure that our publications are correct. If you follow our guidance in this publication and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we must still apply the law correctly. If that means you owe us money, we must ask you to pay it but we will not charge you a penalty. Also, if you acted reasonably and in good faith we will not charge you interest. If you make an honest mistake in trying to follow our advice and guidance in this publication and you owe us money as a result, we will not charge you a penalty. However, we will ask you to pay the money, and we may also charge you interest. If correcting the mistake means we owe you money, we will pay it to you. We will also pay you any interest you are entitled to. You are protected under GST law if you rely on any GST advice in this publication. If you rely on this advice and it later changes, you will not have to pay any extra GST for the period up to the date of the change. If you feel that this publication does not fully cover your circumstances, or you are unsure how it applies to you, you can seek further assistance from us. We regularly revise our publications to take account of any changes to the law, so make sure that you have the latest information. If you are unsure, you can check for a more recent version on our website at or contact us. This publication was current at June ABOUT THIS GUIDE If you operate a small business as a sole trader, partnership, company or trust, you can use this guide to find out more about the small business concessions for: capital gains tax (CGT) income tax goods and services tax (GST) pay as you go instalments (PAYG instalments) fringe benefits tax (FBT). You may be eligible to choose from the following concessions: choice to account for GST on a cash basis choice to pay GST by instalments annual apportionment of GST input tax credits simplified trading stock rules simplified depreciation rules entrepreneurs tax offset CGT 15-year asset exemption CGT 50% active asset reduction CGT retirement exemption CGT rollover provisions PAYG instalments based on GDP-adjusted notional tax two year period for amending assessments (exceptions may apply) immediate deductions for certain prepaid business expenses FBT car parking exemption (applies from 1 April 2007). For more information about your tax obligations as a small business operator, refer to: Recordkeeping for small business (NAT 3029) GST for small business (NAT 3014) Carrying on a business at or from your home (NAT 10709) PAYG withholding for small business (NAT 8075). TERMS WE USE When we say business we mean the individual, partnership, company or trust that carries on the business activity. When we say small business we mean small business entity, which is an individual, partnership, trust or company with aggregated turnover less than $2 million. Throughout this guide you will find important notes (look for the symbol) that will help you with key information you should note. You will also find more information boxes (look for the symbol) that will show any further steps you may need to take or supplementary information you may need to refer to. COMMONWEALTH OF AUSTRALIA 2008 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney-General s Department, Robert Garran Offices, National Circuit, Barton ACT 2600 or posted at PUBLISHED BY Australian Taxation Office Canberra June 2008 JS 10169

3 CONTENTS 01 THE SMALL BUSINESS CONCESSIONS 3 Using income tax concessions 3 The 25% entrepreneurs tax offset 3 Simplifi ed depreciation rules 3 03 THE AGGREGATION RULES 13 When do the aggregation rules apply? 13 Affi liates 13 What does connected with you mean? 14 Prepaid expenses 3 Simplifi ed trading stock rules 3 Review of assessments 4 Simplifi ed tax system (STS) accounting method 4 Small business capital gains tax concessions 4 Gross domestic product (GDP) adjusted PAYG instalment amounts 5 GST cash accounting 6 GST and annual private apportionment 6 GST instalments 7 Fringe benefi ts tax on car parking COMPARING THE INCOME TAX CONCESSIONS ENTREPRENEURS TAX OFFSET (ETO) 20 About the ETO 20 Who is eligible for the ETO 20 How to work out the ETO 21 Being eligible for more than one ETO 25 ETO and PAYG instalments 25 ELIGIBILITY 8 Are you a small business for the current year? 8 Winding up a business 9 How to work out your aggregated turnover SIMPLIFIED DEPRECIATION RULES 26 Low-cost assets 26 Small business pools 26 Taxable purpose 26 Adjustable value 26 Applying the simplifi ed depreciation rules 27 Record keeping 27 CONCESSIONS FOR SMALL BUSINESS ENTITIES 1

4 CONTENTS Assets you held at the start of the year 27 Assets you fi rst use during an income year 30 Cost addition amounts 31 Asset disposals 32 Working out the closing pool balance 33 Cars 34 If you choose to stop using these rules 34 If you can no longer use these rules 34 Contractors and consultants 35 Exclusions 35 Options 35 Rollover relief 36 Other capital expenditure 38 DEFINITIONS 45 SUPPORT FOR SMALL BUSINESS 48 Internet 48 Phone 48 Business seminars and workshops 48 Business assistance visits 48 Other services 48 HOW TO ACCESS OUR PUBLICATIONS 49 Obtain our publications online 49 Order our publications by phone 49 Other useful products 49 MORE INFORMATION 50 INDEX PREPAID EXPENSES 39 Applying the prepayment rules 39 How to treat prepaid expenses 39 Prepaid expenses you do not apportion 39 Prepaid expenses that must meet the 12-month rule SIMPLIFIED TRADING STOCK RULES 42 What is trading stock? 42 Trading stock rules for small business 42 Applying the trading stock rules 43 2 CONCESSIONS FOR SMALL BUSINESS ENTITIES

5 THE SMALL BUSINESS 01 CONCESSIONS From 1 July 2007, you will be eligible for a range of small business concessions if you: carry on a business, and your aggregated turnover is less than $2 million. When we say aggregated turnover we mean your annual turnover combined with the annual turnover of any other business you are affiliated or connected with. For more information about calculating your aggregated turnover, see chapter 02. For more information about the aggregation rules, see chapter 03. SIMPLIFIED DEPRECIATION RULES If you are using the simplified depreciation rules, you must: immediately write off most depreciating assets costing less than $1,000 each pool most other depreciating assets with an effective life of less than 25 years in a general small business pool and claim a 30% deduction for them each year pool most other depreciating assets with an effective life of 25 years or more in a long-life small business pool and claim a 5% deduction for them each year, and claim a deduction for most assets you have purchased or acquired during the year at either 15% or 2.5% in the first year. This applies regardless of when you purchased or acquired them during that year. USING INCOME TAX CONCESSIONS The income tax concessions were previously only available as a package to businesses in the simplified tax system (STS). From the income year, the STS no longer operates and the concessions are now available individually. To be eligible for these concessions, you must satisfy a range of conditions. If you were previously in the STS, you can continue to use the concessions if you are a small business. However, you no longer have to use all the concessions you can choose to use those that best suit your business. Chapter 04 shows how income tax applies if you choose to use the concessions. For information about the other concessions available to small businesses, refer to: our website at Division 328 of the Income Tax Assessment Act THE 25% ENTREPRENEURS TAX OFFSET If your aggregated turnover is $50,000 or less, you can claim a tax offset of up to 25% of the income tax you must pay on your business income. The tax offset will progressively phase out when your total aggregated turnover is between $50,000 and $75,000. For more information, see chapter 06. PREPAID EXPENSES You can choose to claim an immediate deduction for certain prepaid expenses that satisfy the 12-month rule, such as: subscriptions to professional associations rent insurance payments. For more information, see chapter 07. SIMPLIFIED TRADING STOCK RULES If the difference between the value of your opening stock and a reasonable estimate of your closing stock is $5,000 or less, you do not have to: account for changes in the value of your trading stock, or do stocktakes for tax purposes. For more information, see chapter 08. For more information, see chapter 05. CONCESSIONS FOR SMALL BUSINESS ENTITIES 3

6 01 THE SMALL BUSINESS CONCESSIONS REVIEW OF ASSESSMENTS For the and later income years, we can only review and amend a small business income tax assessment within two years from when the Commissioner gives you notice of your assessment. This period can be extended in certain circumstance for example if there has been fraud or evasion. For the , and income years the two year period of review was only available to a business that was in the STS. For more information, refer to Review of your assessment and record keeping on our website. To view this information, visit and select: For business Business homepage Income tax for business Small business concessions essentials Period of review. SIMPLIFIED TAX SYSTEM (STS) ACCOUNTING METHOD If you used the STS before 1 July 2005, you had to use the STS accounting method. After this time, you could choose whether or not to continue with the STS accounting method. For the and later income years, the STS has been replaced by the small business provisions. You may only continue using the STS accounting method if you: were using the STS accounting method continuously since before 1 July 2005 were in the STS in , and are a small business from onwards. If you meet these three requirements, you can continue using the STS accounting method until you choose not to, or you are no longer a small business. For more information, refer to Simplified tax system accounting method (NAT 3957). SMALL BUSINESS CAPITAL GAINS TAX CONCESSIONS Basic conditions To qualify for any of the small business CGT concessions, you must first satisfy at least one of the following basic conditions: You are a small business. You satisfy the maximum net asset value test. You are a partner in a partnership that is a small business, and the CGT asset is an asset of the partnership. Also, the asset must satisfy the active asset test (see page 5). There are additional basic conditions if the CGT asset is a share in a company or an interest in a trust. For more information, refer to the Guide to capital gains tax concessions for small business (NAT 8384). There are four CGT concessions you can use. You can use as many concessions as you want to until any capital gain you make is reduced to nil. However, you must meet the conditions of each concession before you can use it. There are rules about the order in which you can apply: the CGT small business concessions any current year or prior year capital losses, and the CGT discount. The CGT discount may be available in addition to the small business concessions if you have held the asset for at least 12 months. Small business 15-year exemption Any capital gain you make from disposing of a business asset is exempt from CGT if you: have owned the asset for 15 years, and are aged 55 years or over and retiring, or are permanently incapacitated. Small business 50% active asset reduction If you have owned an asset that you have used in your business, your capital gain is reduced by 50% when you dispose of the asset. Small business retirement exemption Any capital gain you make from disposing of a business asset when you retire is exempt from CGT up to a lifetime limit of $500,000. If you are under 55, the capital gain will only be exempt from CGT if you pay it into a complying super fund or a retirement savings account. Small business rollover You can use this concession to defer a capital gain from the disposal of a business asset for two years or longer if you: purchase or acquire a replacement asset, or make a capital improvement to an existing asset. While the rollover lets you defer a capital gain to a later income year, you may be able to use other CGT small business concessions to exempt or reduce your capital gain. 4 CONCESSIONS FOR SMALL BUSINESS ENTITIES

7 01 THE SMALL BUSINESS CONCESSIONS The maximum net asset value test To pass this test, the total net value of your CGT assets must not exceed $6 million. Use the aggregation rules to work out which businesses you must include when working out if you meet this test. The net value of your CGT assets is their total market value, less any liabilities you owe relating to those assets, for example a business loan to purchase the asset. Some assets are excluded from the test. The active asset test An asset must meet certain conditions to qualify as an active asset. Your asset must be used or held ready for use in, or inherently connected with: your business the business of your affiliate or connected entity (see pages 13 and 14), or your spouse or child under 18 years of age. A share in a company or an interest in a trust can also be an active asset under certain circumstances. Certain CGT assets cannot be active assets, for example, assets whose main use is to derive rent. In addition, your CGT asset must be active for: 7½ years if you have owned it for more than 15 years, or half of the total period you have owned it if you have owned it for less than 15 years. These time rules are modified for CGT assets you purchased or acquired under the rollover provisions relating to assets which were: compulsorily acquired lost, or destroyed. The time rules are also modified where you have been transferred a CGT asset under the rollover provisions relating to marriage breakdown. In the 2008 Budget the Government announced that it will increase access to the small business capital gains tax (CGT) concessions for businesses with turnover less than $2 million via the small business entity test, for taxpayers owning a CGT asset used in the business of a related (affiliate or connected) entity, and partners owning a CGT asset used in the partnership business. The changes will apply with effect from the income year. At the time of publication of this guide this legislation had not been introduced to the parliament. For more information, visit our website at For more information about CGT, refer to: Guide to capital gains tax concessions for small business (NAT 8384) Advanced guide to capital gains tax concessions for small business (NAT 3359) GROSS DOMESTIC PRODUCT (GDP) ADJUSTED PAYG INSTALMENT AMOUNTS If you report and pay PAYG instalments quarterly, you can choose to pay instalment amounts we work out for you. The amount we work out is printed on your quarterly activity statement or instalment notice. This can save you time in working out the amount you need to pay. You can choose the GDP adjusted instalment option in your first quarter of the income year (usually, this is the activity statement or instalment notice due in October) and that option applies for the whole of the income year. If you choose this option, you must pay the amount shown at label T7 on your activity statement or instalment notice. Transitional rule For the and income years, there is a transitional rule for companies. In those income years, if you operate a company, you will be able to access the GDP adjusted payment option if: your base assessment instalment income (BAII) is less than $2 million, or you are also eligible to pay your PAYG instalments annually. From the income year onwards, if you operate a company that is a small business, you will be eligible to access the GDP adjusted payment option regardless of the amount of your BAII. How we work out your instalment amount The information we use to work out your instalment amounts is generally taken from your most recently assessed income tax return. We also adjust your instalment amounts to take expected economy changes (as measured by GDP) into account. If you choose to pay the PAYG instalments we work out, we will work out your income tax when we process your income tax return. If we find you have made an overpayment, we will refund it to you, provided you have no other tax debts. If we find the amount you have paid does not fully cover the tax you must pay, you must make an additional payment to cover the shortfall. CONCESSIONS FOR SMALL BUSINESS ENTITIES 5

8 01 THE SMALL BUSINESS CONCESSIONS If the instalment amount does not match your expected income tax liability If you believe the instalment amounts we work out will add up to be more or less than the total income tax you must pay for the income year, you can: pay the instalment amounts we work out and have any overpayments refunded or make up any shortfall once your income tax return is processed vary your instalment amounts each quarter, or work out your PAYG instalment amount yourself using the instalment rate instalment income option. You may be liable to pay the general interest charge if you vary your instalment down and end up paying less than 85% of the tax that you should have paid on your business and investment income. You will not be liable for additional charges if you simply pay the amount we work out for you. For more information, refer to GDP adjusted PAYG and GST instalment amounts (NAT 5094). GST CASH ACCOUNTING You can choose to either account for GST on a cash basis or non-cash (accruals) basis. The tax period in which you account for GST depends on which accounting basis you choose. Accounting for GST on a cash basis means you can: account for the GST you must pay on sales you make in the same tax period you receive payment for them, and claim GST credits for the GST you pay in the price of your business purchases in the same tax period that you pay for them. When claiming GST credits for purchases that cost more than $82.50 (including GST), you must have a valid tax invoice. If you do not have a valid tax invoice, you must wait until you receive one from your supplier before you claim the GST credit, even if this is in a later reporting period. You can also access this concession if you: are not operating a business, but are carrying on an enterprise with a GST turnover of $2 million or less account for income tax on a cash basis carry on a kind of enterprise that we have determined is able to account for GST on a cash basis regardless of its GST turnover, or are an endorsed charitable institution, trustee of an endorsed charitable fund, gift-deductible entity or government school, regardless of your GST turnover. For more information, refer to Cash and non-cash accounting (NAT 3136). GST AND ANNUAL PRIVATE APPORTIONMENT If you choose to use the GST annual private apportionment concession, when claiming GST credits for the GST you paid in the price of business assets you purchase you: do not need to estimate how much you intend to use an asset for private purposes can claim a GST credit for the total amount of GST you paid in the purchase price of the asset in most situations, and make a single adjustment after the end of your income year to account for the extent you used the assets for private purposes. This adjustment will either increase the amount of GST you must pay or reduce your GST refund for the tax period in which you make it. When you can use annual private apportionment You can use annual private apportionment if you do not report GST annually or pay GST by instalments. You can also access this concession if: you are not operating a business, but are carrying on an enterprise with a GST turnover of $2 million or less, and you do not pay GST by instalments or report GST annually. Your election will take effect from the beginning of the earliest tax period for which your activity statement is not yet due. This election will continue to apply until you are no longer eligible, or you cancel your choice to use this option. You do not need to notify us when you choose annual private apportionment but you must keep a record of your decision to do so. Your records must include the date you chose annual private apportionment and the date it took effect. For more information, refer to GST and annual private apportionment (NAT 12877). 6 CONCESSIONS FOR SMALL BUSINESS ENTITIES

9 01 THE SMALL BUSINESS CONCESSIONS GST INSTALMENTS You can choose to report and pay the GST you have to pay to us in instalments and lodge an annual GST return. We will work out the amount you need to pay in each instalment; however, you can vary this amount if you want to. We will refund any amount of GST that you have overpaid when you lodge your annual GST return, provided you have no other tax debts. If we find the amount you have paid does not fully cover the GST you must pay, you must make an additional payment to cover the shortfall. Under most circumstances, if you choose to pay GST by instalments, you will pay four quarterly instalments in an income year. You may be eligible to pay GST in two instalments in an income year if you are: carrying on a primary production business a special professional such as an author, inventor, performing artist, production associate or sportsperson. When you can pay GST by instalments You may be eligible to pay your GST by instalments if you: do not lodge your activity statement monthly have lodged an activity statement for at least two quarters (or four months if you previously lodged your activity statement monthly) have lodged all your previous activity statements as required, and were not in an overall GST net refund position in the previous year (this does not include the first activity statement you lodged). If you are currently lodging monthly activity statements for GST purposes and want to pay GST by instalments, you must first change to lodge quarterly. You can also access this concession if you are not operating a business, but are carrying on an enterprise with a GST turnover of $2 million or less and you meet the four criteria stated above. Once you choose the instalments option, you must use it for the rest of the financial year. We will only refund any extra GST you have paid to us after you lodge your annual GST return. FRINGE BENEFITS TAX ON CAR PARKING You may have to pay fringe benefits tax (FBT) on benefits you (as an employer) provide to your employees or their associates (such as family members). However, you may be exempt from FBT on car parking benefits you provide. When you incur FBT on a car parking fringe benefit You provide a car parking fringe benefit for each day you provide parking for an employee and you meet all of the following conditions: a car is parked at premises that you own, lease or otherwise control the car is parked for a total of more than four hours between 7.00am and 7.00pm on the day either you provided the car or it is owned, leased or otherwise controlled by your employee you provide the parking as part of your employee s employment the car is parked at or near your employee s primary place of employment on that day your employee uses the car to travel between home and work (or work and home) at least once on that day within a one-kilometre radius of the premises where the car is parked, there is a commercial parking station that charges a fee for all-day parking, which is more than the car parking threshold the commercial parking station, at the beginning of the FBT year, charges a representative fee for all-day parking that is more than the car parking threshold. When car parking you provide is exempt from FBT Car parking benefits you provide are exempt from FBT if: you do not provide the car parking in a commercial car park you are not a government body, a listed public company or a subsidiary of a listed public company, and your business was a small business for the last income year before the relevant FBT year (the FBT year is from 1 April to 31 March). If you do not meet the definition of small business, you may still be entitled to the FBT car parking exemption. For more information, refer to: GST instalments (NAT 4238) Varying your GST instalments (NAT 4239). For more information, refer to Fringe benefits tax a guide for employers (NAT 1054). CONCESSIONS FOR SMALL BUSINESS ENTITIES 7

10 02 ELIGIBILITY This chapter contains the information you need to work out if you are a small business for an income year. You must review your eligibility each year. When we say business we mean the individual, partnership, company or trust that carries on the business activity. When we say small business we mean small business entity, which is an individual, partnership, trust or company with aggregated turnover less than $2 million. ARE YOU A SMALL BUSINESS FOR THE CURRENT YEAR? You are a small business if you are an individual, partnership, company or trust that: carries on a business for all or part of the income year, and has less than $2 million aggregated turnover. Three ways to work out if you are a small business To work out if you are a small business for the current year: 1 use your aggregated turnover for the previous income year 2 estimate your aggregated turnover for the current year as at the beginning of the current year, or 3 use your actual aggregated turnover for the current year as at the end of the current year. Most businesses will find the first method easiest. You must: use the same method for any connected or affiliated business, and keep records of how you worked out your aggregated turnover. There are some exceptions and limitations to the estimated current year and actual current year methods. For more information about what it means to carry on a business, refer to: Am I in business? (NAT 2598) Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (The examples used in this ruling relate to primary production activities but the principles can be applied to other activities.) Aggregated turnover Aggregated turnover is your annual turnover plus the annual turnovers of any businesses you are connected or affiliated with. You must use the aggregation rules to work out if you need to include another business annual turnover in your aggregated turnover. These rules stop larger businesses splitting their activities to inappropriately access small business concessions. For more information, see The aggregation rules in chapter 3. Method 1 Use your previous year s aggregated turnover If your aggregated turnover for the previous income year was less than $2 million, you are a small business for the current year. When you work out your aggregated turnover for the previous income year, apply the current rules about aggregated turnover as if they were in force for the income year. Method 2 Estimate your current year aggregated turnover If your estimated aggregated turnover for the current year is less than $2 million, you will be a small business for the current year. You can only use this method if your aggregated turnover was less than $2 million for one of the last two income years. You must work out whether your aggregated turnover is more likely than not to be less than $2 million based on the conditions you know about at the beginning of the income year or, if you are starting a business part way through the year, at the time you start your business. 8 CONCESSIONS FOR SMALL BUSINESS ENTITIES

11 02 ELIGIBILITY Factors to consider when estimating your turnover include: your turnover in previous income years whether you plan to reduce or increase staff in the current year whether your business operating hours will increase or decrease whether previous extraordinary sales or product lines will be available in the current income year whether your business will face increased competition in the current income year whether your business activity will increase or decrease because of changing conditions. When you work out your aggregated turnover for previous income years, apply the current rules about aggregated turnover as if they were in force for those years. If your aggregated turnover was $2 million or more in the income year and your STS group turnover figure was less than $2 million, you can use your STS group turnover figure. Method 3 Use your actual current year turnover If your actual aggregated turnover at the end of the current year is less than $2 million, you are a small business for the current year. If you use your actual aggregated turnover, you cannot use the goods and services tax (GST) and pay as you go (PAYG) instalments concessions for that income year. This is because you must choose these concessions earlier in the income year. If you are not a small business in an income year, you may still be able to access the: capital gains tax concessions if you pass the $6 million maximum net asset value test fringe benefits tax concession if your combined ordinary and statutory income is less than $10 million. WINDING UP A BUSINESS In a year when you are winding up a business, you will be taken to be still carrying on the business and have access to these concessions if you: are winding up a business you previously carried on, and you were a small business in the income year you ceased business. If you were an STS taxpayer in the year you ceased business, you are taken to be a small business in a later year when you are winding up your business for the purposes of the following concessions: simplified depreciation rules simplified trading stock rules entrepreneurs tax offset prepaid expenses two year period of review. EXAMPLE: A business operating for part of an income year Rosa has a business and plans to retire in March She decides to gradually ease out of the business and doesn t take on any new clients after March Rosa s turnover for both the and income years was more than $2 million so she cannot estimate her turnover for To be an eligible small business for the income year, Rosa must use her actual current year turnover. When Rosa finishes her business in March 2009, her turnover for the income year to date is $1.1 million. Rosa is an eligible small business for because she estimates that her turnover would have been $1.5 million for the full income year. CONCESSIONS FOR SMALL BUSINESS ENTITIES 9

12 02 ELIGIBILITY HOW TO WORK OUT YOUR AGGREGATED TURNOVER Step 1 work out your annual turnover (for the previous or current year) Your annual turnover includes all ordinary income you earned in the ordinary course of business for the income year. Turnover means your gross income, not your net profit. If you operate multiple business activities, either as a sole trader or within the same business structure, you must include the income from all your activities when working out your annual turnover. For example, a sole trader operating a part time consultancy and a retail shop would include the income from both business activities when working out annual turnover. EXAMPLE: Amounts included and not included in ordinary income Include these amounts trading stock sales fees for services you provide interest from business bank accounts amounts you receive 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 you charge on a transaction amounts you borrow for the business proceeds from selling business capital assets insurance proceeds for the loss or destruction of a business asset amounts you receive from farm management deposit repayments Special rules for working out your annual turnover Operating a business for part of the year If you start or cease a business part way through an income year, you must make a reasonable estimate of what your turnover would have been if you had carried on the business for the entire income year. This rule applies for all three methods of working out whether you are a small business. Non-arm s length business transactions Include any income from transactions with an associate in your turnover. If the dealing was not at arm s length (that is, the goods or services were sold at a discounted price because of their association with you) you must use the market value of the goods or services when working out your annual turnover. However, you may take into account any discounts that you would have been offered had the dealing been at arm s length. EXAMPLE: Non-arm s length business transactions Lana carries on a printing business and Max carries on a florist business. Lana and Max are married and are therefore each other s associate. Lana manufactures 200 gift cards for Max which he uses in his florist business. Lana only charges him the amount it costs her to manufacture the gift cards, with no profit margin. This is a non-arm s length transaction between associates, so the amount that Lana must include in her turnover is the ordinary income she would have made from the sale of the gift cards if the transaction had been at arm s length. A useful guide for the amount she must use is the price she would charge any regular customer (taking into account bulk discounts that she would offer other customers). If the aggregation rules do not apply to you, your aggregated turnover will be the same as your annual turnover. You do not need to read any further. If you must consider the aggregation rules, or are not sure if they apply to you, go to step 2. Retail fuel sales Do not include retail fuel sales when working out your turnover. This is a special rule because sales of retail fuel are characteristically high in sales volume with low profit margins. 10 CONCESSIONS FOR SMALL BUSINESS ENTITIES

13 02 ELIGIBILITY Step 2 consider the aggregation rules You must include the annual turnover of a relevant business with your annual turnover when working out your aggregated turnover. A relevant business is a business that, at any time during the income year, is: connected with you, or is your affiliate. For more information, see The aggregation rules in chapter 3. EXAMPLE: Aggregation rules Lana and her husband Max each own 50% of the shares in a company Lamax Pty Ltd. Max has a florist business and Lana runs a printing business. Max and Lana do not have any involvement in each other s businesses. Lana and Max are connected to Lamax Pty Ltd because they control the company. Lamax Pty Ltd is a relevant business of both Lana and Max. If you have a relevant business, repeat step 1 for each relevant business to work out their annual turnover. You must use the same method for working out your annual turnover and the annual turnovers of all your relevant businesses. Step 3 work out your aggregated turnover To work out your aggregated turnover, add the annual turnovers of relevant businesses to your annual turnover. When working out your aggregated turnover, do not include income: from dealings between you and a relevant business from dealings between any of your relevant businesses, and of a business when it was not your relevant business. If your aggregated turnover is less than $2 million you are a small business for the current year. EXAMPLE 3: Working out aggregated turnover Julie runs a clothing business and her brother Jason runs a kitchen supplies store. Julie and Jason are associates but they are not affiliates because they do not act in concert with one another or according to the directions or wishes of each other in regard to their respective businesses. Julie and Jason each own 50% of the shares in a third business, JJ Photographics Pty Ltd. They are both connected with JJ Photographics Pty Ltd. Julie must include JJ Photographics turnover in her aggregated turnover because JJ Photographics is connected with Julie. Julie will not include any income from her transactions with JJ Photographics. Julie will not include Jason s turnover in her aggregated turnover because Jason is not Julie s affiliate. Jason must include JJ Photographics turnover in his aggregated turnover because JJ Photographics is connected with Jason. Jason will not include any income from his transactions with JJ Photographics. Jason will not include Julie s turnover in his aggregated turnover, as Julie is not Jason s affiliate. CONCESSIONS FOR SMALL BUSINESS ENTITIES 11

14 02 ELIGIBILITY The following chart will help you work out if you are a small business for the current year. Are you carrying on a business? No Yes Was your aggregated turnover less than $2 million in the previous income year? Yes You are a small business and can access the PAYG instalments, GST, CGT, FBT and income tax concessions. No Was your aggregated turnover in one of the two previous income years less than $2 million? Yes Is your current year aggregated turnover likely to be less than $2 million? Yes You are a small business and can access the PAYG instalments, GST, CGT, FBT and income tax concessions. No No Was your actual aggregated turnover (worked out at the end of the current income year) less than $2 million? Yes You are a small business and can access the CGT, FBT and income tax concessions. You cannot access the PAYG instalments and GST concessions because you must choose these earlier in the year. No You are not a small business. For more information about aggregation rules: see The aggregation rules in chapter 3 refer to subdivision 328 C of the Income Tax Assessment Act 1997 What is a small business entity? 12 CONCESSIONS FOR SMALL BUSINESS ENTITIES

15 THE AGGREGATION RULES 03 You must use the aggregation rules to work out whether you must add any other businesses annual turnover to your annual turnover when working out your aggregated turnover. When we say business we mean the individual, partnership, company or trust that carries on the business activity. When we say small business we mean small business entity, which is an individual, partnership, trust or company with aggregated turnover less than $2 million. If you are aggregated with one or more other businesses, you do not need to use a particular concession just because some or all of those other businesses have chosen to use it. WHEN DO THE AGGREGATION RULES APPLY? The aggregation rules apply if another business: is your affiliate, or is connected with you. These businesses are also called relevant businesses. If your aggregated turnover is $2 million or more, you may still be eligible for the small business CGT concessions if you satisfy the $6 million maximum net asset value test. You also use the aggregation rules to work out when another entity is your affiliate, or is connected with you, for the purposes of the $6 million maximum net asset value test. AFFILIATES What is an affiliate? An affiliate is any individual or company that, in relation to their business affairs, acts or could reasonably be expected to act: according to your directions or wishes, or in concert with you. Trusts, partnerships and superannuation funds cannot be your affiliates. What does in concert with you mean? Broadly, acting in concert with you in relation to their business affairs means there is a substantial degree of dependence on, or connection with you. Factors to consider in working out whether an individual or company is acting in concert with you are: the nature and extent of the commercial dealings between you and that entity whether one of the entities is under a formal or informal obligation to purchase goods or services or conduct aspects of their business with the other entity any common resources, facilities or services the other s involvement in the managerial decisions and day-to-day management financial interdependencies (for example financial support or shared banking arrangements) any common flow of profits any common ownership or capital backing. Working together on a specific venture and sharing in the profits of that venture does not automatically mean two entities are acting in concert, if the underlying businesses continue to operate independently. Generally, another business would not be acting in concert with you if they: have different employees have different business premises have separate bank accounts do not consult you on business matters, and conduct their business affairs independently in all regards. None of these factors are conclusive in their own right. You need to consider these factors in combination to determine if another entity is acting in concert with you. An individual or company is not automatically your affiliate because of the relationship they have with you, or their relationship with an entity that is common to you both. For example, if you are a partner, another partner in the same partnership is not your affiliate just because that partner acts, or could reasonably be expected to act, together with you in relation to the affairs of that partnership. To be your affiliate, the partner must act in concert with you in respect of a business separate from that partnership. Similarly the following will not automatically be affiliates of each other: directors of the same company directors and the company they are a director of individuals or companies who are joint trustees of the same trust. Are franchisees and franchisors affiliates? Franchisees are not necessarily affiliates of the franchisor simply because of the franchise arrangement. Whether the franchisee acts in concert with the franchisor in respect of their franchise business depends on, among other things, the nature of the franchise agreement between them. CONCESSIONS FOR SMALL BUSINESS ENTITIES 13

16 03 THE AGGREGATION RULES Are spouses and children affiliates? Neither a spouse nor a child under the age of 18 years is automatically your affiliate. You must consider whether they are acting according to your directions or wishes, or in concert with you, in relation to their business affairs. EXAMPLE: Not affiliates Matt and Sandy are husband and wife. They share in the running of their household. Matt carries on a cleaning business with an annual turnover of $1.7 million while Sandy carries on a bakery with an annual turnover of $1.8 million. They have nothing to do with each other s business. They have: separate bank accounts for their businesses different business locations their own employees. Neither Matt nor Sandy control the management of the other s business. Even though Matt and Sandy are married neither is an affiliate of the other because they: do not act in concert with each other in respect of their businesses, and do not act according to the directions or wishes of the other. Therefore neither Matt nor Sandy has to include the annual turnover of the other s business in calculating the aggregated turnover of their own business. WHAT DOES CONNECTED WITH YOU MEAN? An entity is connected with another entity if: either entity controls the other, or both entities are controlled by the same third entity. For example an entity is connected with you if that entity: is controlled by you controls you is controlled by another entity that also controls you is controlled by your affiliate is controlled by you together with your affiliate is controlled by an entity that you control (see the indirect control test on page 16). You work out whether a control relationship exists between entities using the control rules below. Control of a company You must consider whether you have an interest in any company and whether your affiliates have an interest in any companies. You control a company if you, your affiliates, or you together with your affiliates have: shares and other equity interests in the company that give you and/or your affiliates at least 40% of the voting power in the company, or the right to receive at least 40% of any income or capital the company distributes. EXAMPLE 1: Control of a company Yusef is a sole trader. He also owns shares in a company that carry 50% of the voting power in the company. Yusef controls the company. EXAMPLE 2: Control of a company Lucy is a sole trader. Her interests in Cool Computers give her 30% of the voting rights in that company. Sean is Lucy s affiliate. He also owns interests in Cool Computers that gives him 30% of the voting rights in that company. Lucy controls Cool Computers because Lucy s interests and Sean s interests together give them the right to exercise more than 40% of the voting rights in Cool Computers. Lucy must include Cool Computers and Sean s turnover when working out her aggregated turnover. Control of a partnership You control a partnership if you, your affiliates, or you together with your affiliates have the right to 40% or more of the partnership s net income or capital. EXAMPLE: Control of a partnership Olivia and Jill are partners in a professional practice. As they each have a 50% interest in the partnership they each control the partnership and would therefore need to include the partnership s turnover when working out their eligibility. Control of a fixed trust You control a fixed trust if you, your affiliates, or you together with your affiliates have the right to receive 40% or more of any income or capital the fixed trust distributes. 14 CONCESSIONS FOR SMALL BUSINESS ENTITIES

17 03 THE AGGREGATION RULES Control of a discretionary trust There are two tests for control of a discretionary trust. You control a discretionary (non-fixed) trust if you meet either of these tests. Distribution test You meet the distribution test if, in any of the previous four income years, you, your affiliates or you together with your affiliates received a trust distribution of 40% or more of the total income or capital the trust distributed for that income year. Influence over the trustee test You meet the influence over the trustee test if the trustee either acts, or might reasonably be expected to act, according to the directions or wishes of you, your affiliate or you together with your affiliates. You must consider all the circumstances to work out whether you satisfy this test. For example, to prove that you had no influence over the trustee, it would not be enough for the trust deed to say the trustee must ignore your directions or wishes. Some factors you might consider include: the way the trustee has acted in the past the relationship between you and/or your affiliates and the trustee the amount of property or services you and/or your affiliates transferred to the trust any arrangement or understanding between you and any person who has benefited under the trust in the past. Control of a discretionary trust trustee did not make a distribution Where the trustee of a discretionary trust did not make a distribution because the trust had a tax loss or no taxable income, the trustee can nominate up to four beneficiaries as controllers of the trust for that income year. The implications of being a nominated controller are different for the aggregation rules and the active asset test. For the purposes of the aggregation rules, if you are a nominated controller, you are not connected with the trust. This means that you do not have to include either the trust s turnover for the aggregated turnover test or the value of the trust s net assets when considering whether you meet the maximum net asset value test. For the purposes of the active asset test, if you are a nominated controller, you are connected with and are taken to control the trust for that income year. This means that an asset you hold can qualify as your active asset (and potentially be eligible for the CGT concessions) where it is used or held ready for use in the business of the trust. Additionally, if the asset you hold is an intangible asset such as goodwill, it can be your active asset if it is inherently connected with the business of the trust. Before , this rule applied differently. If you were a nominated controller for the or earlier years you were connected with the trust for that year for the purposes of the maximum net asset value test. EXAMPLE: Control of a trust Gavin is working out whether he is an eligible small business for the income year. In the income year, Gavin received a distribution from a discretionary trust which was 70% of the total amount of the income the trust distributed in that income year. Gavin controls that trust because he received a distribution of income in that was more than 40% of the total amount of income distributed that year. When working out his aggregated turnover, Gavin must include the annual turnover of the trust. Transitional rules can apply to stop your business losing access to concessions. Transitional rules control of a discretionary trust Transitional rules can apply to stop you losing access to the former STS concessions because of the introduction of the 40% distribution test for discretionary trusts. These rules only apply for the purpose of accessing the following concessions: simplified depreciation rules simplified trading stock rules entrepreneurs tax offset deductibility of prepaid expenses two year amendment period. This transitional rule allows you to use the distribution test that existed under the STS grouping rules rather than the 40% distribution test. Under the STS grouping rules, you control a discretionary trust if, in any of the previous four income years, the trustee of that trust distributed $100,000 or more to you, your affiliates, or you and your affiliates together. Under the transitional rule you do not control the trust if the distribution was greater than 40% but less than $100,000. This rule will only apply for distributions made before the income year. This rule will stop having effect for the and later income years. CONCESSIONS FOR SMALL BUSINESS ENTITIES 15