Small business entities

Eligibility

You are eligible to be a small business entity for an income year if:

• you carry on a business in that year, and
• you have an aggregated turnover of less than $10 million.

Similarly to the previous grouping rules that existed under the former simplified tax system, the new aggregation rules use the concepts of ‘connected with’ (which is based on control) and ‘affiliates’ to determine whether the turnover of any related businesses need to be included in the aggregated turnover of your business.

It is not necessary to specifically elect to be an eligible small business each year in order to access the concessions. However, you must assess your eligibility for the concessions each year.

For more information see Eligibility as a small business entity.

Instant asset write-off

There have been changes to the instant asset write-off threshold.

The threshold for assets that were first acquired at or after 7.30pm AEST on 12 May 2015 is:

$20,000 if they were first used or installed ready for use from 7.30pm (AEST) on 12 May 2015 until 28 January 2019

$25,000 if they were first used or installed ready for use from 29 January 2019 until before 7.30pm (AEDT) on 2 April 2019

$30,000 if they were first used or installed ready for use from 7.30pm (AEDT) on 2 April 2019 until 11 March 2020

$150,000 if they were first used or installed ready for use from 12 March 2020 to 30 June 2020

The car limit applies to limit the instant asset write off deduction where a car is designed to mainly carry passengers.

For more information see Small business entity concessions.

Simplified depreciation rules

If you are an eligible small business, you may choose to calculate deductions for your depreciating assets using these rules.

In general, the taxable purpose proportions of the adjustable values and second element of cost amounts of most:

• depreciating assets costing less than the relevant instant asset write-off threshold are written off immediately
• other depreciating assets are pooled in a general small business pool and deducted at the rate of 30%
• newly acquired assets are deducted at 15% (half the pool rate) in the first year, regardless of when they were acquired during the year. However, if the new asset is eligible for the Backing business investment incentive then, in the first year it is added to the pool, it has an accelerated rate of 57.5%. See Backing business investment – accelerated depreciation

The threshold at which a small business writes off the total balance of the general small business pool is aligned with the relevant instant write-off threshold, which is $150,000 for 30 June 2020.

The taxable purpose proportion is your reasonable estimate of the proportion you will use, or have installed ready for use, a particular depreciating asset for a taxable purpose.

If you are eligible, and choose to continue to use the simplified depreciation rules, you will continue to include any new depreciating assets in the relevant pool. If you choose not to use the simplified depreciation rules you cannot add any new assets to those pools. You can alternatively account for those assets under UCA; see Small business entity concessions.

Rollover relief

As part of the small business tax concessions, you may be able to defer any gain or loss resulting from a transfer of a depreciating asset between entities with the same economic ownership under the small business restructure roll-over concessions, which apply from 1 July 2016.

Modifications, under the Commissioner's remedial power, may apply to the asset disposal to prevent unintended taxation consequences where:

• a transfer takes place on or after 8 May 2018, and
• the asset transferred satisfies conditions under a small business restructure roll-over.

For more information, see:

• Small business restructure rollover
• Commissioner's Remedial Power CRP 2017/2 Taxation Administration (Remedial Power – Small Business Restructure Roll-over) Determination 2017.

Certain start-up expenses immediately deductible

From the 2015–16 income year, certain start-up expenditure that would be deductible over five years under section 40-880 of the ITAA 1997 is fully deductible in the income year in which the expenditure is incurred.

Expenditure may be fully deductible in the income year incurred if:

• it relates to a small business that is proposed to be carried on

and

• it is incurred  
  • in obtaining advice or services relating to the proposed structure or the proposed operation of the business, or
  • in payment to an Australian Government agency of a fee, tax or charge relating to setting up the business or establishing its operating structure
   

and

• in that income year in which the deduction is claimed, the entity that incurred the expenditure  
  • is a small business entity, or
  • does not carry on a business and does not control or is controlled by an entity carrying on a business in that income year that is not a small business entity in that income year.
   

Professional advice and services relating to the structure or the operations of the proposed business

Professional advice and services that may be deductible under this section include advice from a lawyer or accountant on how the business may be best structured as well as services such individuals or firms may provide in setting up legal arrangements or business systems for such structures. It does not include the cost of acquiring assets that may be used by the business. Similarly, advice and services in relation to the operation of the proposed business includes professional advice on the viability of the proposed business (including due diligence where an existing business is being purchased) and the development of a business plan.

Payments to Australian Government agencies

Payments of taxes, fees or charges relating to establishing the business or its structure to an Australian Government agency may be immediately deducted under this section.

An Australian Government agency is a Commonwealth, state or territory government (or an authority of these). Local governments are included as an authority of the relevant state or territory government.

Broadly, this category of expenditure includes regulatory costs incurred in setting up the new business. Examples include the costs associated with creating the entity that may operate the business (such as the fee for creating a company) and costs associated with transferring assets to the entity which is intended to carry on the proposed business (for example, the payment of stamp duty). It does not include expenditure relating to taxes of general application such as income tax. The payment of these general taxes does not relate to establishing a business or its structure but instead to the operation and activities of the businesses. Such general taxes are also not normally deductible under section 40-880.

Eligible taxpayers

Immediate deductibility is also limited to expenditure by certain entities, with the effect of excluding expenditure incurred by larger businesses.

If the claimant entity carries on a business in the income year, it must itself be a small business entity which is broadly defined under tax law as an entity with an aggregate annual turnover of less than $10 million.

Alternatively, if this entity does not carry on a business in the income year it must not be connected with or be an affiliate an entity that carries on a business in the income year that is not a small business entity.

 

Assets for which deductions are claimed under UCA

For some depreciating assets, deductions must be claimed under UCA rather than under the simplified depreciation rules:

• assets allocated to a low-value or a common-rate pool before you started to use the simplified depreciation rules (those assets must remain in the pool and deductions must be claimed under UCA)
• horticultural plants
• in-house software where the development expenditure is allocated to a software development pool; see Software development pools, and
• assets that are leased out, or are expected to be leased out, for more than 50% of the time on a depreciating asset lease. (This does not apply to depreciating assets subject to hire purchase agreements, or short-term hire agreements on an intermittent hourly, daily, weekly or monthly basis where there is no substantial continuity of hiring.)

Depreciating assets used in rental properties are generally excluded from the simplified depreciation rules on the basis that they are subject to a depreciating asset lease.

You cannot deduct an amount for a decline in value of second-hand depreciating asset in a residential rental property under the simplified depreciation rules if the amount is not deductible under UCA.

Capital expenditure deductible under UCA

As the simplified depreciation rules apply only to depreciating assets, certain capital expenditure incurred by a small business entity that does not form part of the cost of a depreciating asset may be deducted under UCA for deducting capital expenditure.

This includes capital expenditure on certain business related costs and amounts directly connected with a project; see Capital expenditure deductible under UCA.

In-house software

Under UCA, you can choose to allocate to a software development pool expenditure you incur in developing (or having another entity develop) in-house software you intend to use solely for a taxable purpose. Once you allocate expenditure on such software to a pool, you must allocate all such expenditure incurred thereafter (in that year or in a later year) to a pool; see Software development pools.

If you have allocated such expenditure to a software development pool either before or since using the simplified depreciation rules, you must continue to allocate such expenditure to a software development pool and calculate your deductions under UCA.

If you:

• have not previously allocated such expenditure to a software development pool and you choose not to do so this year, or
• incur the expenditure in developing in-house software that you do not intend using solely for a taxable purpose

then you can capitalise it into the cost of the unit of software developed and claim deductions for the unit of in-house software under the simplified depreciation rules when you start to use it (or install it ready for use) for a taxable purpose.

Its decline in value can then be worked out using an effective life of:

• four years (if you started to hold the in-house software under a contract entered into after 7.30pm AEST on 13 May 2008 or otherwise started to hold it after that day), or
• five years (if the in-house software is first used or first installed ready for use on or after 1 July 2015)

and using the prime cost method.

Deductions for in-house software acquired off the shelf by a small business entity for use in their business are available under the simplified depreciation rules. For example, such an item costing less than $1,000 will qualify for an outright deduction.

For information on the deductibility of website expenses, see Taxation Ruling TR 2016/3 Income tax: deductibility of expenditure on a commercial website.

Primary producers

A small business entity can choose to claim deductions under either the simplified depreciation rules or UCA for certain depreciating assets used in the course of carrying on a business of primary production.

The choice is available for:

• water facilities
• fencing assets
• fodder storage assets
• depreciating assets relating to  
  • landcare operations
  • electricity connections and phone lines.
   

You can choose to claim your deductions under the simplified depreciation rules or UCA for each depreciating asset. Once you have made the choice, it cannot be changed.