Small business entities thresholds
Small businesses with an aggregated turnover of less than $10 million are called small business entities and may qualify for a range of tax concessions. Prior to 1 July 2016 the aggregated turnover threshold was $2 million.
The $10 million aggregated turnover threshold applies to most concessions, except for:
- the small business income tax offset, which is available to businesses with an aggregated turnover of less than $5 million from 1 July 2016 (claimed by individual beneficiaries)
- the capital gains tax (CGT) concessions, where the aggregated turnover threshold of $2 million continues to apply.
Eligible businesses can choose to use the concessions that best suit their needs. However, eligibility must be reviewed each year.
Businesses that would be small business entities if the aggregated turnover threshold was $50 million may also be eligible for some concessions.
Depending on its aggregated turnover for an income year, the small business entity may be eligible for the following concessions:
- CGT 15 year asset exemption
- CGT 50% active asset reduction
- CGT retirement exemption
- CGT rollover provisions
- simplified depreciation rules
- immediate deduction for certain prepaid business expenses
- immediate deduction for a range of business start-up expenses
- simplified trading stock rules
- choice to account for GST on a cash basis
- annual apportionment of GST input tax credits in certain circumstances
- paying GST by instalments
- FBT car parking exemption
- FBT work-related devices exemption
- PAYG instalments based on GDP-adjusted notional tax
- Bonus deductions for expenditure on skills and training or technology investment.
Many of these concessions have additional eligibility conditions that must also be satisfied.
A beneficiary who is an individual may be entitled to a tax offset on the tax payable on their share of net small business income earned by a trust that is a small business entity with an aggregated turnover of less than $5 million. For more information, see item 5 Business income and expenses.
For more information, see Small business CGT concessions.
In 2015–16 and 2016–17, a beneficiary that was a small business company may have been entitled to a reduced company tax rate. From 2017–18, a beneficiary that is a base rate entity may be entitled to a reduced company tax rate. For more information, see Changes to company tax rates.
Eligibility
A trust is eligible for the small business entity concessions if it is a small business entity. The trust will be a small business entity if it is carrying on a business and has an aggregated turnover of less than $10 million. This is known as the small business entity test.
Trusts that would be small business entities if the aggregated turnover threshold was $50 million are also eligible for certain concessions such as an immediate deduction for certain prepaid business expenses and certain start-up expenses.
Business is defined broadly to include ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’. Carrying on a business is not defined in the tax law, and so takes its ordinary meaning. An entity is taken to be carrying on a business for the purposes of the small business entity test in an income year if:
- the entity is winding up a business it formerly carried on
- it was a small business entity in the income year that it stopped carrying on the business.
Aggregated turnover is the annual turnover of the trust, plus the annual turnovers of any entities that are connected with it or that are its affiliate.
For more information on calculating aggregated turnover including the meaning of connected with or affiliated with the trust, see Small business CGT concessions.
Eligibility must be reviewed each year.
Calculating turnover
Turnover includes all ordinary income the trust earned in the ordinary course of business for the income year. The following are some examples of amounts included and not included in ordinary 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 the trust has charged on a transaction
- amounts borrowed for the business
- proceeds from the sale of business capital assets
- insurance proceeds for the loss or destruction of a business asset
- amounts received from repayments of farm management deposits
- JobKeeper payments (although they are ordinary income, they are not earned in the ordinary course of business).
There are special rules for calculating the annual turnover if the trust has retail fuel sales or business dealings with associates that are not at market value.
For more information, see Eligibility.
Aggregation rules
Special rules, called the aggregation rules, will determine who the trust 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 trust or that is its affiliate is referred to as a relevant entity.
When calculating the aggregated turnover of the trust, do not include income from:
- dealings between the trust and a relevant entity
- dealings between any relevant entities of the trust
- a relevant entity when it was not a relevant entity of the trust.
For more information on the aggregation rules, including the meaning of connected with or affiliated with the trust, see Small business CGT concessions.
If the trust carries on a business during the current income year and has an aggregated turnover of less than $10 million under the aggregation rules discussed above, then the trust is a small business entity.
Business operated for only part of the income year
If the trust, 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 trust, or a relevant entity, had carried on a business for the whole of the income year.
Satisfying the aggregated turnover threshold
There are 3 ways to satisfy the $10 million aggregated turnover threshold or the $50 million aggregated turnover threshold. These are:
- the 2021–22 turnover
- an estimate of the 2022–23 turnover
- the actual 2022–23 turnover.
Most businesses will only need to consider the first method.
2021–22 turnover
If the aggregated turnover of the trust for 2021–22 was less than $10 million, the trust was a small business entity for 2022–23, regardless of its estimated or actual aggregated turnover for 2022–23.
If the aggregated turnover of the trust for 2021–22 was less than $50 million, the trust can access the small business entity concessions that have an aggregated turnover threshold of $50 million.
Estimate of 2022–23 turnover
If the estimated aggregated turnover of the trust for 2022–23 is less than $10 million, it is a small business entity for 2022–23.
If the estimated aggregated turnover of the trust for 2022–23 is less than $50 million, the trust can access the small business entity concessions that have an aggregated turnover threshold of $50 million.
If you are estimating your turnover, you need to:
- estimate your turnover based on the conditions you are aware of at the relevant date
- assess whether the aggregated turnover is more likely than not to be less than $10 million or $50 million at the relevant date.
The relevant date is either:
- the first day of 2022–23, or
- the time the business started, if the trust started a business part way through 2022–23.
Trusts that commenced carrying on a business in 2022–23 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 aggregated turnover of the trust in 2019–20 and 2020–21 was equal to or more than the aggregated turnover threshold.
Actual 2022–23 turnover
This method is only needed if the first 2 tests cannot be met.
If the actual aggregated turnover of the trust was less than $10 million at the end of 2022–23, the trust is a small business entity for that year.
If the actual aggregated turnover of the trust was less than $50 million at the end of 2022–23, the trust can access the small business entity concessions that have an aggregated turnover threshold of $50 million.
If the trust is a small business entity by means of this method only, it cannot use the GST and PAYG concessions for 2022–23, as those particular concessions must have been chosen earlier in 2022–23.
Former STS taxpayers
There is a transitional rule for former STS taxpayers that deals with the continued use of the STS accounting method.
There is also a special rule that applies if the trust is winding up a business this year that it previously carried on and it was an STS taxpayer in the income year it ceased business.
For more information, see Former STS taxpayers in Business and professional items 2023 and Small business CGT concessions.
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