How to get the most out of small business tax concessions in Australia

Whether you're a sole trader, a partnership firm, or a small company establishing roots, it takes a lot of effort and time to keep your organisation running smoothly. Small businesses are the backbone of Australia's economy, and that's why the government consistently allocates funds and tax concessions to help them thrive. In this post, we'll have a look at what you, as a small business, need to know about these tax benefits.

Additional reading: How to lodge your tax returns as a business

In today's online world, "small business" is a loose definition. Qualifying as one can depend on employee size, revenue, market share, capital, industry influence, and more. However, for tax purposes, the ATO defines a small business as an entity that generates an annual aggregate turnover of $10 million or less.

Knowing if you're a small business

The ATO requires you to evaluate your earnings every tax period to determine if you're a small business by their standards. This is a mandatory self-evaluation, and you need to maintain the records of how you came to qualify. The ATO will often use these documents to verify your claims to small business concessions.

Three ways to calculate whether you're a small business

There are three ways to do a small business self-evaluation. You can choose whichever method you're comfortable with. However, you have to use the same method for any other business you're affiliated with, such as being a partner or shareholder of another business.

• Method 1: Use your previous year's tax return

If you claimed small business status in the previous tax year, you can use that as a reference for the current year as well. Since you don't need to acquire any additional documents, this is the easiest and most accessible method for most businesses.

• Method 2: Estimate your current year's turnover

This method is only applicable if your turnover for the previous two tax years was less than $10 million. Under this method, you evaluate how much profit you're making now, and estimate your turnover for the end of the year. Since you're relying on an estimate, you need to keep records that can validate your estimation. This includes reports of operational changes, such as to hours, staff, or location, as well as competition reports, which involve reviewing related businesses that opened or closed during the period, mergers, funding, and more.

• Method 3: Use your actual turnover for the current year

Under this method, you have to wait until the end of the year to know exactly how much you've earned. This means you can't register for PAYG (Pay As You Go—where you make tax payments every quarter) or use GST, both of which require planning before the year begins. However, you can still use them in the following tax period and use one of the first two methods to evaluate your small business status.

Mandatory small business taxes

When you register your business, you'll also register for certain taxes based on your business model and industry.

For example, all businesses have to pay income tax. Businesses that earn more than $75,000/year by selling goods and services should register for and pay the GST.

Similarly, if you have employees, you have to register for:

• PAYG withholding - As the employer, you have to withhold a certain amount from your employees' salaries towards their income tax.

• Payroll tax - A tax that you pay to the state or territory government on the amount of wages you pay your employees.

If you sell assets, you'll have to register for the Capital Gains Tax (CGT). This applies to you if you sell or resell assets like property, shares, or machinery. You'll pay a tax on the amount of money you receive from selling those assets. CGT is usually included as a portion of your income tax.

If you purchase land assets, you have to register for Land Tax as well, which varies depending on land prices, stamp duties, and other regulations in that locality.

To attract and retain high-quality employees, most businesses offer benefits like vehicles, digital devices, and accessories. These are fringe benefits, and if you offer these to your employees, you have to register for the Fringe Benefits Tax (FBT) as well.

Have a look at the Australian government's business tax guide for more information about each tax.

Income tax concessions for small businesses

For better understanding, we'll sort small business tax concessions into two main categories.

1. Small business income tax offset

This is a reduction on your total tax, calculated automatically when you lodge your return. This offset reduces your tax by up to $1,000. To be eligible for the small business income tax offset, your turnover for the tax year must be less than $5 million ($2 million if you're lodging for a tax period before 2016). The rate of the offset differs based on your actual turnover. For the 2019–20 period, the offset was 8% of your turnover. This will increase to 13% in 2021-22 and to 16% in 2022-23. Read more about this offset on the ATO's website.

2. Other concessions

Aside from the small business income tax offset, you can also claim concessions such as simpler depreciation rules, reduced professional services expenses, simpler stock and trading rules, and more. Here's ATO's complete list of concessions for small businesses. To claim these concessions, you must meet both of the following criteria:

• You've operated your business for the whole 12 months of the tax year.

• You earned an aggregated turnover of $10 million or less ($2 million if you're lodging for a tax period before 2016).

Calculating your aggregated turnover

How much tax you pay as a business depends on your aggregated turnover. That's why it's important to understand the difference between turnover and aggregated turnover, and the factors to consider when making this calculation.

Aggregated turnover

Aggregated turnover is your total annual turnover + the turnover of all other businesses you're affiliated with. This includes businesses you're a partner or board member of. This often means your aggregated turnover will be higher than you expect.

Here are some examples:

• Aziz is a sole trader who also holds 10% of a construction company's shares. His aggregated turnover is the turnover of his business and the construction company's.

• Sonali's new book shop has operated only for 9 months in a tax period. When calculating her aggregated turnover, Sonali has to include an estimated income for those three months she wasn't in business.

• Lowana is an artist. Her friend Daku manages a local exhibition, and Lowana sells him a $1,000 worth of art for $900. This is a sale at non-arm's length because she offered him a discount she normally wouldn't have.

In her tax turnover, Lowana has to include the sale in its original market value ($1,000), which is also called a sale at arm's length. However, if she would have offered discounts on her sale regardless of the buyer, she could then include the discounted sale in her turnover. For example, consider Lowana offers a standard 10% discount to whoever purchases $10,000 worth of art. In that case, she can deduct the 10% from her turnover.

Further reading: 5 ways to reduce your taxes

 Whether you've been in business for a while or you're thinking about starting one up, we hope this post has given you a basic understanding of how you can approach your taxes as a small business. If you need guidance at any point while lodging your tax return, you can contact the ATO directly. They also offer after hours support for small businesses.

If there are any other topics you'd like us to cover, let us know in the comments and we'll be sure to get to it!

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